the impact of the global coffee trade on dak lak province, viet nam: analysis and policy...

8/7/2019 The Impact of the Global Coffee Trade On Dak Lak Province, Viet Nam: Analysis and policy recommendations

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Information Centre for Agricultural Oxfam Great Britain andand Rural Development (ICARD) Oxfam Hong Kong

THE IMPACT OF THE GLOBAL COFFEE TRADE

ON DAK LAK PROVINCE, VIET NAM:

ANALYSIS AND POLICY RECOMMENDATIONS

Final

September 2002


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Contents

Acronyms and abbreviations.. vAcknowledgements.. vi

Chapter 1 Introduction ......................................................................................................... 11.1Justification and objectives of the research ................................................................... 11.2Research sites ............................................................................................................... 11.3Research methodology.................................................................................................. 2

1.3.1 The team............................................................................................................ 21.3.2 Qualitative research ........................................................................................... 21.3.3 Quantitative research......................................................................................... 3

1.4Limitations of the research............................................................................................. 41.5Structure of the report.................................................................................................... 4

Chapter 2 The coffee market: global to local ..................................................................... 52.1The global coffee market ............................................................................................... 5

2.1.1 The coffee trade in the 20th century ................................................................... 5

2.1.2 Coffee consumption........................................................................................... 62.1.3 Production and trade today................................................................................ 62.1.4 Attempts to stabilise the world coffee price........................................................ 72.1.5 The future........................................................................................................... 8

2.2Viet Nam and the global coffee market.......................................................................... 82.2.1 A rapid increase in coffee cultivation.................................................................. 82.2.2 Coffee: a key export........................................................................................... 82.2.3 Low domestic consumption................................................................................ 92.2.4 Tight links with the global economy ................................................................... 92.2.5 Admission to the WTO ..................................................................................... 102.2.6 The Vietnamese coffee market and TNCs ....................................................... 10

2.3Coffee production in Dak Lak province........................................................................ 112.3.1 Society, economy, and environment................................................................ 112.3.2 An increase in coffee production...................................................................... 122.3.3 Production costs............................................................................................... 132.3.4 Processing and export of Dak Lak coffee ........................................................ 14

Chapter 3 Stakeholders in the local coffee market ......................................................... 173.1Households in the survey area .................................................................................... 173.2Coffee-growing households ......................................................................................... 193.3Ethnic minority women................................................................................................. 193.4Private middlemen and coffee export businesses ....................................................... 20

Chapter 4 The impact of coffee production and trade on Dak Lak ................................ 22

4.1The impact on livelihoods ............................................................................................ 224.1.1 Changing living standards................................................................................ 224.1.2 Increasing population density........................................................................... 224.1.3 Food insecurity................................................................................................. 234.1.4 Reduced school attendance............................................................................. 234.1.5 Changing income sources................................................................................ 244.1.6 Indebtedness.................................................................................................... 274.1.7 Insufficient capital............................................................................................. 284.1.8 The need for cash and even lower selling prices ............................................. 294.1.9 A new need for (weak) extension services....................................................... 304.1.10Limited benefits from input-support programs.................................................. 304.1.11Price information: less relevant, less accessible.............................................. 31

4.1.12Deforestation.................................................................................................... 314.1.13Land shortage .................................................................................................. 324.1.14Water resources............................................................................................... 33


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4.2A look at the stakeholders............................................................................................ 334.2.1 The impact on coffee monoculture households ............................................... 334.2.2 The impact on diversified households.............................................................. 344.2.3 The impact on the poor .................................................................................... 344.2.4 The impact on ethnic minorities ....................................................................... 35

4.3Coping strategies......................................................................................................... 364.3.1 Coping strategies of the rich ............................................................................ 364.3.2 Coping strategies of medium-off and poor households.................................... 37

Chapter 5 Simulations of the impact of current and future policies on coffeeproduction and producers in Viet Nam ............................................................................ 39

5.1The impact of current policies...................................................................................... 395.1.1 Increasing coffee production............................................................................ 395.1.2 Temporary storage........................................................................................... 405.1.3 Encouraging exports ........................................................................................ 405.1.4 Providing subsidies.......................................................................................... 415.1.5 Extension policy ............................................................................................... 41

5.2Potential impact of future policies ................................................................................ 42

5.2.1 Reducing area planted to coffee ...................................................................... 425.2.2 Increasing farm gate prices.............................................................................. 435.2.3 Increasing productivity ..................................................................................... 435.2.4 Foreign exchange policy .................................................................................. 445.2.5 Narrowing the price gap between Viet Nam and other countries..................... 44

Chapter 6 Conclusions and Recommendations .............................................................. 456.1Conclusions ................................................................................................................. 456.2Recommendations....................................................................................................... 46

6.2.1 Key policy recommendations ........................................................................... 466.2.2 Strengthening support to farmers..................................................................... 486.2.3 Improving competitiveness............................................................................... 49

6.2.4 Strengthening poverty reduction ...................................................................... 50References. 52Annex 1: Research sites 53Annex 2: PAM Framework. 56Annex 3: Econometric Models. 59

TablesTable 1 Transnational coffee companies and their affiliates..................................................11Table 2 Increasing yield, area and output of Dak Lak coffee, 1990-2000 .............................13Table 3 Average production costs and DRC index for Dak Lak coffee, 1994-1999 ..............13

Table 4 Coffee transportation costs, 2001.............................................................................15Table 5 Comparison of wellbeing ranking characteristics by district .....................................17Table 6 Gender divisions in work and decision-making in ethnic minority families ...............20Table 7 Ownership of various assets by district (%)..............................................................22Table 8 Difficulties of households by district (%) ...................................................................22Table 9 Differences between food-shortage and food-sufficient households........................23Table 10 Income from coffee and as a percentage of total household income by district and

household type, 2001 (VND million) ..........................................................................25Table 11 Agricultural land use by district (ha/household)......................................................25Table 12 Other income sources of coffee producers.............................................................25Table 13 Debt by household type and source (VND million) .................................................27Table 14 Average selling price of coffee by household type, 2001 (VND/kg)........................30

Table 15 Coffee purchasers by household type, 2001 (%)....................................................30Table 16 Average area and age of coffee trees by district and household type (ha and years)

................................................................................................................................... 35


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Table 17 Values of some variables measuring subsidy policy impact...................................41Table 18 Export price (US$/ton) of Vietnamese coffee as a function of changes in coffee

output of Viet Nam and Brazil ....................................................................................42Table 19 Impact of improving productivity on profit and cost.................................................43Table 20 Impact of reducing irrigation time on profit and cost ...............................................43Table 21 Impact of exchange rate adjustments on profit and price.......................................44Table 22 Impact on profit and price of narrowing the gap between Viet Nams export price

and the world price.....................................................................................................44Table 23 The poverty situation by district ..............................................................................53Table 24 Causes of poverty by district and province-wide (number of households) .............53Table 25 Table 1 The Policy Analysis Matrix.........................................................................56Table 26 Coffee Production & Export of Vietnam and Brazil ................................................59

FiguresFigure 1 Sustainable livelihoods framework ............................................................................2Figure 2 World coffee price fluctuations, 1982-2002 ...............................................................5Figure 3 World coffee output and exports................................................................................6

Figure 4 Coffee output of five countries, 2001 (million tons) ...................................................6Figure 5 Market share of major coffee producers, 2001..........................................................9Figure 6 Main importers of Vietnamese coffee, 2001..............................................................9Figure 7 Domestic, export and world coffee prices,19902001 (US$/ton) ............................10Figure 8 Market share of green coffee by TNC, 1998 ...........................................................10Figure 9 Market share of roasted and instant coffee by TNC companies (1998) ..................11Figure 10 Coffee-growing area by region ..............................................................................12Figure 11 Coffee output by region .........................................................................................12Figure 12 Coffee processing..................................................................................................14Figure 13 The coffee chain in Dak Lak 2001: from producers to exporters...........................15Figure 14 The wet processing coffee chain in Dak Lak .........................................................16Figure 15 Migration to Dak Lak, 1976-2000 ..........................................................................23Figure 16 Comparison of average debt of food-shortage versus food-sufficient households29Figure 17 Differences in land area between food-shortage and food-sufficient households ....32Figure 18 Drop in investment for fertiliser..............................................................................36Figure 19 Vietnamese coffee export volumes and prices, 1990-2001...................................39Figure 20 Export revenue and elasticity of demand ..............................................................40Figure 21 Storage policy holds back the speed of price reduction rather than increasing

coffee prices...............................................................................................................41Figure 22 Helping farmers diversify production .....................................................................48

BoxesBox 1 No money for shoes ....................................................................................................24

Box 2 Banks are also in trouble.............................................................................................27Box 3 Using a loan for a non-productive purpose makes repayment difficult........................28Box 4 Middlemen with non-performing loans are also in a precarious position.....................29Box 5 No money to apply extension lessons.........................................................................30Box 6 Lower access to in-kind loans for the poor.................................................................. 31Box 7 The perennially poor" lack land ..................................................................................32Box 8 No buyers for the farm!................................................................................................33Box 9 Poor monoculture households suffer...........................................................................34Box 10 The better-off are not very affected by low coffee prices...........................................34Box 11 A poor ethnic minority household follows extensive cultivation.................................35Box 12 Richer households keep their trees and hope...........................................................36Box 13 The poor still rely on coffee and cling to the hope of a better life ..............................37Box 14 Cottona way out for coffee producers?..................................................................38


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Acronyms and abbreviations

ACPC The Association of Coffee-Producing CountriesDanida Danish bilateral aid agencyDARD Department of Agriculture and Rural Development

DRC domestic resource costEPC effective rate of protection coefficientEU European UnionFAO Food and Agriculture OrganisationGDP gross domestic productGSO General Statistics OfficeHCM City Ho Chi Minh CityICA International Coffee AgreementICARD Information Centre for Agricultural and Rural DevelopmentICO International Coffee OrganisationMARD Ministry of Agriculture and Rural DevelopmentNEZ New Economic Zone

NPCI nominal protection coefficient of inputNPCO nominal protection coefficient of outputOGB Oxfam Great BritainOHK Oxfam Hong KongPAM policy analysis matrixPRA participatory rural appraisalSOE state-owned enterpriseTNC transnational corporationUS United StatesVAC vuon-ao-ca(integrated garden and fish pond production system)VBARD Viet Nam Bank for Agriculture and Rural DevelopmentVND Vietnamese dongWTO World Trade Organisation

Exchange rate

US$1 = VND 15,000(approximate; as of September 2002)


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Acknowledgements

This report has benefited from the contributions of many people. We would like to expressour sincere thanks to officials of the Dak Lak DARD and of the districts, communes, villagesand enterprises surveyed for spending their valuable time to facilitate our research and talk

with us about the research topic and many other things. Particular thanks go to the officialswho accompanied our team during the fieldwork and helped us interact with the local people.

We would also like to express our special thanks to the surveyed households, and especiallythe women, who shared with us information on their lives, lifestyles, intentions and desires.Without their active contributions, our research could not have been successful.

Due to the limited time and large scale of the research, and the complicated nature of theissue studied, this report may contain some errors. We warmly welcomes comments fromreaders.


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Chapter 1 Introduction

1.1 Justification and objectives of the research

One of the negative impacts of trade liberalisation and increased dependency on exports is

stronger domestic price fluctuations. When prices increase substantially, excessiveproduction expansion may take place, which causes downward pressure on prices,ultimately putting those in the coffee industry into serious crisis. Price fluctuations increasethe vulnerability of farmers as well as of people in the processing industry and some traders.

Dak Lak's experience is typical of the impact of trade liberalisation on producers and traders,especially the poor. Coffee prices reached a historical high in the 1990s, precipitating over-production and then price dampening. This has had a serious negative impact on thelivelihoods of Vietnamese coffee producers, particularly in Dak Lak province, the largestcoffee-producing area in Viet Nam.

Given current low global coffee prices, increasing globalisation, and the continuing move

toward trade liberalisation, such situations are likely to happen with greater frequency, whilefarmers, especially the poor, will continue to be the most vulnerable to them. The purpose ofthe research was to investigate:

1. Vietnamese coffee producers' living situation, desires, and reactions to the changes intheir industry, and the potential for them (and in particular the poor) to improve theirliving situation;

2. The situation of and potential for coffee production in Viet Nam as a whole and Dak Lakin particular; and

3. The policy changes needed to strengthen economic development and reduce thepoverty of Vietnamese coffee producers.

1.2 Research sites

Dak Lak province can be divided into three regions:1 Region 1: Highly favourable for coffee growing (including Cu Mgar, Krong Ana, Krong

Buk, Krong Nang, Ea Hleo, and Dak Mil districts); Region 2: Moderately favourable for coffee growing (including Dak Lap, Dak Nong, Buon

Don, Krong No, and Cu Jut districts); and Region 3: Unfavourable for coffee growing (including Lak, Krong Bong, Ea Sup, and Ma

Drak districts).

After discussions with officials of the Dak Lak Department of Agriculture and Rural

Development (DARD) and consideration of relevant socio-economic factors, includingpoverty levels, one district from each region was chosen: Region 1: Cu Mgar district, with the largest coffee plantation area in the province (41,500

ha) and the highest living standard when coffee prices were high; Region 2: Buon Don district, with the smallest coffee plantation area in the province

(3,500 ha); it is one of the poorest districts in this region; and Region 3: Lak district, one of the poorest districts in the province (1,390 ha of coffee).

In each district, one commune with a relatively large coffee production area was selected: Ea Pok commune, Cu Mgar district; Ea Nuol commune, Buon Don district; and

Dak Phoi commune, Lak district.1

These regions were identified by coffee experts in the Dak Lak Department of Agriculture and RuralDevelopment.


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After discussions with commune officials, three villages in each commune were chosen, withpriority given to sites with a higher percentage of ethnic minority people. In total, ninevillages were surveyed, including eight ethnic minority villages and one Kinh (ethnicVietnamese) village. Over 90% of households interviewed were E De and M'nong ethnicminority people; therefore, most research results about households in this report are aboutethnic minority households.

1.3 Research methodology

1.3.1 The team

The research team was composed of 14 people from the Information Centre for Agriculturaland Rural Development (ICARD) of the Ministry for Agriculture and Rural Development(MARD), the Department of Agriculture and Rural Development Policy, the AgriculturalEconomics Institute, the Dak Lak DARD, Oxfam Great Britain (OGB) and Oxfam Hong Kong(OHK). District and commune staff from the focus area also assisted the team in the fieldwork. Researchers from ICARD, OGB and OHK co-ordinated to design, organise, and

implement the survey, process data and prepare this report.

1.3.2 Qualitative research

A sustainable livelihoods framework was used for the qualitative research (Figure 1), withinwhich questions focused first on the livelihood outcomes of a number of households, andthen on those households' livelihood strategies. Many participatory rural appraisal (PRA)tools were used, including an open form of wealth or wellbeing ranking, in-depth semi-structured household interviews, focus group discussions (with women in particular),ranking/scoring, timelines, timetables, cause-effect diagrams, card-writing, and institutionalanalysis. Key issues examined included decision-making process trends on such topics asinvestment, the marketing of coffee and agricultural diversification, and womens priorities.

Figure 1 Sustainable livelihoods framework2

Fifty households were interviewed of which 44 were ethnic minorities (mainly E De andM'Nong) and six were female-headed. Seventy-eight women in six focus groups were also

interviewed.

2Neefjes, Koos, Environments and Livelihoods: Strategies for Sustainability, Oxford: Oxfam (2000).

Vulnerabilitycontext

trends seasonality shocks

(in nature,

environment,markets,politics)

Policies,processes and

structures

laws, publicpolicies,incentives,regulations

private sectorpolicy andbehavior

civic, politicaland economicinstitutions(markets,culture)

Livelihoodstrategies

of social actors(men, women,households,communities)

natural resource-based and/ormarket-based

diverse survival or

Livelihoodoutcomes

more income increased

wellbeing reduced

vulnerability improved

food security improved

sustainabilityof naturalresources

non-use:values ofnaturesecured

Livelihoodcapital

Physical

Naturalresources

Social Financial

Human


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The research group met with 53 key informants, including: (a) village representatives, suchas village heads, village elders, representatives of womens associations, and people with asubstantial understanding of local livelihoods, (b) the leadership of the Dak Lak DARD, (c)employees of some enterprises specialising in processing, exporting and/or supplying inputsfor coffee production, (d) commune-based middlemen, (e) representatives of the districtbranches of the Viet Nam Bank for Agriculture and Rural Development, and (f) leaders of allsurveyed communes and districts. Information was collected on the coffee market chain andlocal enterprises, and on the processing and transportation characteristics of enterprises inthe chain.

The researchers facilitated wealth ranking in the nine villages by a total of 23 key informants(18 men and 5 women). For the two or three larger villages, after drafting a socio-economicmap of the village, the research group randomly selected 50 households in each village tobe wealth-ranked, rather than carrying out the exercise for all households.

All qualitative information was cross-checked with the results of the quantitative householdsurveys, leaders' and other key informants' ideas, and other relevant data from the

quantitative research and secondary documents.

1.3.3 Quantitative research

Two types of economic model were used in the quantitative analysis, Policy Analysis Matrix(PAM) and econometric model . PAM was used to assess the impact of existing andpotential policies on a variety of factors, including the income levels of different coffeeproducer groups in Dak Lak, especially the poor. As with other models, PAM is based on anumber of assumptions and binding conditions, and assesses the impact of a particularpolicy or policy change by holding other factors constant. Therefore, the conclusions drawnfrom the model are not flawless. But model-based assessments of trends and scales ofchange can provide useful information to policy makers about the importance of each policy

to target groups. Policy makers can then decide which policies should be implemented in theshort term and the long term.

Econometric models were used to estimate the relations between Vietnamese export priceof coffee and the quantity of Vietnamese as well as Brazilian exports of coffee. Throughthese models, ones can derive the optimal quantity of coffee production for Vietnam thatwould maximize its export revenue. These results are useful information for policy-makers todecide how much area of land should be allocated to coffee plantation, and policy-makersthen can implement different policies to achieve the targeted area. It should be notice thatthe estimations of econometric models are based mainly on the empirical data of 1994-2001provided by General Statistics Office (GSO).

In order to provide all necessary data inputs for the PAM model, two household surveyswere undertaken: (a) an in-depth quantitative survey of 175 households chosen randomlyfrom within each of the wealth-ranked groups in all surveyed villages; a detailedquestionnaire was used to gather data on the coffee production and processing andconsumption patterns of each wealth-ranking group; and (b) a broad-based quantitativesurvey of 891 households, including 318 in Cu Mgar District, 310 in Buon Don District, and263 in Lak District. For this survey, a short, simple questionnaire was used to gather generalinformation about the characteristics of coffee farmers in the three regions.

Finally, a commodity chain survey was carried out with 18 enterprises in the coffeecommodity chain (middlemen, processors, and exporters) in the three districts.


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Secondary documentation was also collected and analysed, including research documentsrelating to the coffee sector, information from newspapers and the internet, DARDinformation on coffee research and production, and local development plans.

1.4 Limitations of the research

The research team faced a number of constraints which may have led to some errors in thereport, including:

a general paucity of data, as well as inconsistencies in existing data from varioussources, on coffee production in general, Vietnamese coffee prices, and Viet Nam'scompetitors, especially over the long term. As a result, in a number of cases thequantitative assessment had to rely on assumptions or the recommendations ofcommodity experts in order to reach conclusions;

the fact that this report is one of the first efforts in Viet Nam to combine qualitative andquantitative research into a single study. Differences in methodology and difficulties inco-ordination should be understandable and were unavoidable;

researchers' inability to communicate directly with interviewees. Some households didnot speak Vietnamese and interviewers did not speak the ethnic minority languagesused in the area; and

inexact information from villagers. People had difficulty recalling the amounts of inputsthey used on their farms; records had not been kept systematically.

1.5 Structure of the report

This first chapter briefly describes the justification and objectives, research sites,methodology and constraints of the research. An introduction to the research sites is given inthe Annex.

The second chapter describes the coffee market globally, in Viet Nam and in Dak Lakprovince, and gives some details of coffee processing in Viet Nam.

The third chapter introduces the key stakeholders in the coffee business in Viet Nam,including coffee-producing households and coffee-related enterprises.

The fourth chapter covers the impact of increased liberalisation of the Vietnamese coffeetrade on coffee producers and others involved in coffee trading, and discusses some of thecoping mechanisms of households hit by low coffee prices.

The fifth chapter summarises the results of PAM analysis on the impact of current and future

policies on the coffee trade and coffee trade stakeholders.

Finally, conclusions and recommendations drawn from the qualitative and quantitativeanalysis are presented in Chapter 6.


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Chapter 2 The coffee market: global to local

2.1 The global coffee market

2.1.1 The coffee trade in the 20thcentury

The 20th century has seen a number of periods of high coffee prices due to supply deficits,as well as the devastation of many economies due to the two World Wars, resulting in areduction in coffee demand and in coffee plantation areas. When economies stabilised afterWorld War II, an increase in the demand for coffee resulted in higher prices, whichencouraged developing countries to expand their coffee plantation areas. During the mid-1960s, however, oversupply led to a collapse of the world coffee price. Since the 1960s,coffee exports have been growing substantially despite controls instituted under variousInternational Coffee Agreements (ICA). At present, there are about 75 coffee-producingcountries, mainly in South America, Africa and Asia, employing about 10 million labourersand producing approximately 6 million tons annually on a total area of over 10 million ha.The coffee export volume has more than doubled from 40 million 60-kilo-bags/year in the

1960s to around 85-90 million 60-kilo-bags/year in the last two years.

Figure 2 World coffee price fluctuations, 1982-2002

Source: The World Bank, 2002.

During the period 1985-1992, the world coffee trade turnover was valued at about US$8.5billion annually, with a record year reaching US$14 billion (for example, 1986) and a slowyear just US$6 billion (for example, 1992-93). In the 1990s, high coffee prices encouragedproducers to expand coffee production, especially in Brazil and Viet Nam. Between 1993and 2000, the area of land under coffee production increased by 1.56%/year world-wide,while productivity (production, or yield, per ha) increased by 2.45%/year. Brazil's coffeecultivation area increased more slowly than the global average, at 0.76%/year, but its coffeeproductivity increased nearly twice as fast, at 5.36%/year; production increased at8.27%/year. During the same period, Viet Nam's coffee cultivation area increaseddramatically, by about 23.9%/year, and production responded with a huge jump of 20%/year(in 1994, 1995, and 1996, production grew at the even higher rates of 48.5%, 45.8% and33% respectively). Rapid yield increases notwithstanding, Vietnamese coffee productivity(production, or yield, per ha) grew at roughly the same rate as Brazil'san average of

6.4%/year.


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The world coffee supply is heavily reliant on weather conditions, especially in the largestexporting countries of Brazil and Columbia. A 1994 frost in Brazil killed or damaged a largeproportion of Brazil's coffee trees, resulting in a global supply shortage and price surge in1995. In a number of coffee-producing countries, coffee exports contribute as much as 80%of foreign currency earnings, resulting in serious socio-economic problems when pricesfluctuate.

2.1.2 Coffee consumption

While coffee production is mainly a developing-country activity, coffee consumption takesplace primarily in developed countries such as the US, the EU countries, and Japan, and innewly industrialised countries such as Singapore and Malaysia. Consumption of coffeebeans over the last 250 years has increased enormously, from 600,000 bags in 1750 to 94million bags in 1995. While in the long term consumption is likely to continue to increasealong with economic growth and the continuing improvement in global living standards, inthe short term, consumption levels have proven to be, and likely will remain, quite volatile. 3Total consumption value is forecast at US$50 billion/year.

2.1.3 Production and trade today

In 2001, the world coffee price dropped to its lowest level in 40 years: in 1999, the price ofRobusta was still relatively high at US$1,300/ton, but by January 2000 it had declined toUS$948/ton, by December 2000 to US$638/ton, and by 2001 to just US$500/ton. Similarly,the price of Arabica dropped from about US$2,000/ton in 2000 to just half that in 2001.

Despite the price downturn, in 2001 the major coffee producers continued to increaseproduction (see Figure 3). Brazilian coffee production was 1.96 million tons, an increase of7.1% over 2000, while production in Viet Nam and Colombia reached 847 thousand tons (a9% increase) and 690 thousand tons (a 21% increase) respectively (see Figure 4). Total

world coffee production was 6.7 million tons (up 5.2% in comparison with 2000) including 4.2million tons of Arabica and 2.5 million tons of Robusta.

Figure 4 World coffee output and exports(million tons)

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001

output expor ts

Sources: ICARD and MARD, 2001.

Along with the increase in production, the volume of the global coffee trade also increased,to 5.1 million tons, an increase of 1.1% over 2000. This represented an expansion in coffeeexports by all the major exporters, led by Viet Nam with an increase of 24%, Colombia nextwith an increase of 8.44%, Indonesia at 8.28%, the Ivory Coast at 5.71%, and Brazil at

3.44%. At the same time, however, a number of other countries began to reduce their

3German Coffee Association, 1997.

Figure 3 Coffee output of five countries,2001 (million tons)

0.0

0.5

1.0

1.5

2.0

2.5

Brazil

Vietna

m

Colom

bia

Indo

nesia

Gua

temala


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exports: El Salvador by 24.3%, Mexico by 24%, India by 12.17%, Honduras by 9.7%,Guatemala by 5.61%, Peru by 4.26% and Uganda by 3.53%.

The increase in production in recent years has led to an oversupply of coffee world-wide,while the relatively low economic growth rates of the major coffee importers such as the US,Germany, Italy and Japan may have contributed to low growth in world coffeeconsumptionjust 0.96%/year. This combination of oversupply and stagnant demand hasstrengthened downward pressure on the global coffee price; according to available figuresfor 2002, all exporting countries except Brazil have begun to respond with reduced exports.

The fall in coffee prices has considerably reduced the foreign currency earnings of coffeeexporters, caused serious difficulties for coffee producers, and forced many countries toreplace coffee with other higher-value cash crops.

2.1.4 Attempts to stabilise the world coffee price

Over the last 60 years, via several mechanisms and forums such as the Association of

Coffee-Producing Countries (ACPC) and the International Coffee Organisation (ICO), coffee-producing countries have made many attempts to stabilise world coffee prices at levelsbeneficial to producers. In 1945, an International Coffee Agreement called FEDECAME wasestablished by 14 Latin American countries to protect their interests, but it collapsed in 1956.Two years later, seven Latin American countries signed an agreement to fix coffee exportquotas and control the exports of 15 Latin American countries, and in 1960, the IACOattempted to co-ordinate with African coffee-growing countries; however, neither effort wassuccessful. In 1963, "the ICO was establishedat a conference [that had been] convenedby the United Nations the previous year as a response to fluctuations in prices and supplyand demand from the 1930s to the 1960s." The main original purpose of the ICO was toadminister the International Coffee Agreement (ICA) that had been created in 1962 to setcoffee supply quotas to limit the world supply of coffee and push up its price.

"[T]he first International Coffee Agreement came into force in 1962 for a period of five years,and [the ICO]has continued to operate under successive Agreements negotiated sincethen. These include the International Coffee Agreement 1968 (and its two extensions), theInternational Coffee Agreement 1976, 1983 (and its four extensions) and the Agreement of1994 (with one extension) approved by the Council for a period of five years beginning 1October 1994. The latest, the 2001 Agreement, entered into force provisionally on 1 October2001." The ICO currently has 63 members from producing countries all over the world.4 TheICO is only a forum of coffee producers, however, with no power to control export quotas forcoffee, and, as with any commodity agreement, has been prone to cheating and quotabreaking.5

Since the decline of world coffee prices began in the early 1990s, producing countries havecontinued the effort to co-ordinate by setting up guidelines to temporarily reduce exportvolumes. These guidelines have been adopted by the ACPC, which includes 28 nationscontrolling 85% of world coffee production. In 1993, a number of countries co-operated tostore 20% of coffee exports to try to reduce coffee supplies and raise prices, and in 2001,the ACPC once again decided to temporarily store 20% of low-quality coffee to try to reducesupply. The implementation of this plan by a number of countries, both ACPC members andnon-members, has had little effect on the price of coffee, however, so a further plan was putforward by ACPC to destroy 5% of poor-quality coffee. This plan has not yet beenimplemented.

4Information and quotes from www.ico.org

5Another effort in 1973 by 21 coffee-producing countries (accounting for 90% of world exports) to establish a

system to store 10% of export coffee collapsed in 1975.


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The many ICAs signed since the 1960s to set export quotas to stabilise coffee prices haveserved in part to distort market signals and widen the price gap between high-quality andlow-quality coffee.

Due to the lack of competition in the coffee market from developed countries, which areconsumers rather than producers, and to the strong competition among the coffee producers(mainly the developing countries) for an increase in sales, relatively low trade barriers areapplied: green coffee beans face few import tariffs. Furthermore, there are no import tariffson processed coffee, whether roasted or instant, coming into the US. Processed coffee canenter the EU tax-free from many African, Caribbean and Pacific countries, as well as frommany countries in Latin America (including Colombia, El Salvador, Guatemala, Honduras,and Nicaragua). But other poor countries, such as India, Viet Nam, and East Timor, pay animport duty of 3.1% on instant and 2.6% on roast and ground coffee, while Brazil andThailand pay tariffs of up to 9% on instant coffee.

2.1.5 The future

Fluctuations in the economies and income levels of importing countries and unstableweather conditions in exporting countries have strongly influenced the supply of and demandfor coffee. This has led to significant fluctuations in world coffee prices. Speculative activitiesin long-term markets and seasonal changes also make coffee prices difficult to forecast.That said, due to the high level of global investment in coffee plantations in recent years, it isestimated that supply will continue to exceed demand in the near future. World coffeeexports are expected to rise to 5.7 million tons while demand, not including demand forreserves, will reach only 5.5 million tons by 2005.

2.2 Viet Nam and the global coffee market

2.2.1 A rapid increase in coffee cultivation

Coffee was first planted in Viet Nam at the end of 19th century. The coffee cultivation areaincreased from several thousand ha in the early 20 th century to 20,000 ha in 1975. From1982 to 1988, the coffee production area was further expanded through investment from andco-operation with former socialist countries.

By 1994, the total nation-wide coffee production area was 150,000 ha, or just 1.32% of VietNam's total crop area. In the late 1990s, this area began to increase much more rapidly, byan average of 20.7%/year, to 516.7 thousand ha in 2000, making up 4.14% of Viet Nam'stotal crop area, and making coffee the third most widely planted crop after rice (whichaccounts for 61.4% of total crop land) and maize (5.7%). Between 1980 and 2000, theVietnamese coffee production area increased 23 times while output increased more than 83times.

2.2.2 Coffee: a key export

One of the main reasons for the rapid increase in the coffee cultivation area was the suddenprice surge in the world coffee market, which brought increased benefits to coffee producers.The global coffee price increased considerably to US$1873/ton in 1994 and then toUS$2411/ton in 1995, due mainly to a severe frost in 1994 that substantially cut the coffeeproduction of Brazil, the worlds biggest coffee producer. Viet Nam gained substantial exportearnings at this time from coffee.

Along with the increase in cultivation area, coffee became one of the most important exportcommodities of Viet Nam in the 1990s. Recently, its annual export value has ranged fromUS$400-600 million, providing between 6% and 10% of national export revenues. Viet Nam


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9

is now recognised as the second largest coffee exporter after Brazil, closely followed byColumbia and Indonesia (see Figure 5). Viet Nam has also become the worlds largestexporter of Robusta, providing 41.3% of the world market in 2001 (Robusta accounts for99% of total coffee output in Viet Nam). However, during the first six months of 2002 therewas a sharp reduction of around 30% in Vietnamese coffee exports compared with the sameperiod in 2001.

Figure 6 Main importers of Vietnamesecoffee, 2001

Source: GSO and Customs Department. Source: ICO Coffee market report, June 2002.

Viet Nam exports coffee to 59 countries (see Figure 6), mainly the US, EU countries(Germany, Switzerland, England, France, the Netherlands, Spain and Italy) and Asia (Japan,Singapore, China, the Philippines, Malaysia and Indonesia).

Viet Nam has undertaken important steps towards expanding its export markets in recentyears, including diversifying trade relations with the region and the world,6 signing a bilateraltrade agreement with the US, and accelerating its accession to the World TradeOrganisation (WTO). However, the expected impact of trade liberalisation in terms of tariffreductions by importing countries will not have a great effect on the Vietnamese exportmarket, because tariff reductions are already large and anyway these countries generallyhave low import tariffs (e.g. the US has a 0% import tax on green beans).

2.2.3 Low domestic consumption

Somewhat ironically, coffee consumption in Viet Nam remains low at around 30,000tons/year, mainly in urban areas. In the future, with considerably improved living standards,the domestic market will develop.

2.2.4 Tight links with the global economy

With over 95% of output for export and with an increasingly liberalised economy, theVietnamese coffee sector has become closely linked with the world coffee trade. Export anddomestic prices have reflected world price fluctuations. The difference between Vietnameseexport prices and international prices has gradually narrowed, though at a slow pace (see

6

China is considered by many as a future potential market. With fast increasing incomes, Chinese consumers'preferences could change from tea to coffee, creating significant movements in the world coffee market.However, the competition to get into this market is very tough. Russia and Eastern Europe are also viewed aslarge potential markets.

Figure 5 Market share of major coffeeproducers, 2001

EU

66%

United

States

17%

Other8%

Singapore

5%

Japan

4%

Brazil

25%

Vietnam

16%

Colombia

11%

Other

29%

Indonesia

6%

Guatemala

5%

India

4%

M exico

4%


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10

Figure 7). In fact, Viet Nam's coffee trade is relatively more liberalised than its trade in otheragricultural products.

Until now, Viet Nam's coffee-related trade policy has beengeared toward furtherliberalisation. Every enterprisenow has the right to buy, sell andprocess coffee for export as wellas domestic consumption. Inrecent years, the level of thecoffee export tax has beenreduced to 0% (zero per cent).The world coffee price has clearlyhad a direct and immediateinfluence on Viet Nam's exportprice and on farmers' selling

prices.

2.2.5 Admission to the WTO

Though admission to the WTO offers Viet Nam a number of advantages, it could expose theVietnamese coffee sector to a number of new challenges as well, as internationalregulations do not allow the application of many of the policies Viet Nam uses to support thecoffee industry. When markets are more closely linked, every price fluctuation in the worldmarket will rapidly be reflected in the domestic market, causing bigger changes in farmersprices and incomes. Traders may also face a number of difficulties since the implementationof trade commitments means fiercer competition with foreign enterprises, even at the firststage of assembling agricultural products for processing.

2.2.6 The Vietnamese coffee market and TNCs

With a history of a state monopoly in coffeeexport, and the recent increase in involvementof the private sector, it is difficult to get a clearpicture of the degree of transnationalcorporation (TNC) activity in the Vietnamesecoffee market. However, it is known thatNeumann and Volcafe, which dominate theinternational coffee trade (in 1998 theycontrolled 29% of the market), are very active inViet Nam, as are a number of other TNCs.

Roasters rely on international coffee traders tosupply very large amounts of beans at shortnotice. At the same time, due to technologicaladvances, the traders are able to vary theirsource of green coffee, since instant coffee cannow use a variety of beans rather than a single source to ensure taste and blend. Thesefactors, together with the large stocks in countries such as Viet Nam and Indonesia, meanthat TNCs can play producers in the region against each other to ensure the best possibleprices. The low price of Vietnamese coffee, and Vietnamese exporters' limited knowledge of

the international market, further increase the control of international traders over contractterms for coffee quality and price.

Figure 7 Domestic, export and world coffeeprices,19902001 (US$/ton)

0

2000

4000

6000

8000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Domestic price Export price World price

Source: GSO and Customs Department.

Figure 8 Market share of greencoffee by TNC, 1998

Neuman

16%Volcafe

13%

Cargill

6%

Esteve

6%

Aron

5%

Dreyfus

3%

Others

44%Mitsubishi

3%

Man

4%


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Roasters such as Nestl and Philip Morris arenow able to source coffee at increasinglylower prices while ensuring that consumerscontinue to pay high prices for an ever moreelaborate array of luxury instant coffees andspeciality blends. Figure 9 shows the level ofcontrol by just a few powerful players in theroasted coffee market. Philip Morris, Nestl,Procter & Gamble, and Sara Lee control 63%of the instant and roasted coffee markets withbrands such as Maxwell House, Nescaf,Folgers, and Douwe Egberts. Nestldominates the instant coffee market and isestimated to have made a clear profit of 26pence on every GB1 of instant coffee sold inthe United Kingdom. Though roasted andground coffees are less profitable than instant coffee, large profits can still be still gained in

the instant coffee market; for instance, Sara Lee makes a substantial profit from itsbeverages unit, which deals mostly in instant coffee.

Table 1 Transnational coffee companies and their affiliatesCompany Affiliated companies and brands

Philip Morris Kraft Food, Jacob Suchard, Maxwell House, Splendid,Grand Mere, CarteNoir, Lyons, Birds, Brim, Gervalia,Maxim

Nestl Tasters Choice, Nescaf, Hills Brothers, Lite, Sarks, MJBSara Lee Douwe Egberts, Merrid, la Maison du Caf, Marcillia, SoleyProcter & Gamble (P&G) Folgers, Millstone, High PointTchibo Eduscho

Source: Ponte 2001, p.17.

Kraft and Douwe Egberts are amongst a number of roasters active in Vietnam, sourcing andtraining producers and processors in their quality requirements. This has given Viet Namvaluable experience in what TNCs desire from their coffee producers. However, a number ofthese programs work with just a few growers and government agencies and exporters.

The profits on the global instant and roasted coffee markets have continued to riseastronomically. However, the producers share in this US$43 billion market has shown asubstantial decline over the last 20 years as International Coffee Agreements have falteredand producers control over prices has been transferred to transnational roasters andtraders. Between 1980/81 and 1988/89, coffee-producing countries managed to retain 20%of the price of coffee, with 55% going to consuming countries. The proportion of incomeretained by producers between 1989/90 and 1994/95 fell to 13%, with consuming countriesretaining 78%.7 At the grassroots level, according to rough calculations, Vietnamese farmersreceive just 35.64 cents/kg of coffee sold, compared to a selling price for instant coffee in theUS of US$16/kg.

2.3 Coffee production in Dak Lak province

2.3.1 Society, economy, and environment

The total population of Dak Lak is nearly 1.8 million people, accounting for 58% of thepopulation of the four provinces in the Central Highlands. Dak Lak's ethnic minority

population is 0.36 million, of which the E De make up 64.5% (18.4% of the provincial

7Ponte, 2001, p.15.

Figure 9 Market share of roasted andinstant coffee by TNC companies (1998)

Source (this and preceding Figure): van Dijk et. al., 1998.

PhilipMorris

25%

Nestle

24%

Sara Lee

7%

P & G

7%

Tchibo

6%

Others

31%


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population) and the M'nong 17% (4.8% of the provincial population). Dak Lak's populationgrowth rate is the country's highest at 6.18%/year.

Dak Lak, with its large area and thinly dispersed population, possesses many favourableconditions for the development of agro-forestry, particularly specialised agriculturalproduction areas. It is located in a tropical region with adequate moisture, temperature andlight for the growth of many kinds of crops. In the dry season, Dak Lak's weather is not verycold, with enough sunlight for planting many crops and drying many agricultural products.Having two separate seasons facilitates crop growth. With most of its basal soil havingadvantageous qualities such as a fine texture, a high water absorption level, and highfertility, Dak Lak is well-suited for the development of various industrial crops includingcoffee,rubber, pepper, and cashew, as well as short-term crops such as hybrid maize andcotton.8

After Viet Nam's reunification in 1975, the state implemented important policies to build DakLak into a New Economic Zone (NEZ) by (a) creating hundreds of agro-forestry state farmsand co-operatives, (b) moving a large number of people from the densely populated

lowlands to the mountainous areas, and (c) encouraging people to reside on state farms andco-operatives. Along with the implementation of reforms since 1986, Dak Lak has achievedmuch, including rapid economic growth: its per capita GDP jumped from US$204 in 1990 toUS$390 in 2000. The structure of agriculture and animal husbandry has been transformed inthe province, with an increase in the planting of industrial crops such as coffee and pepperfor export.

2.3.2 An increase in coffee production

The abrupt increase in the world coffee price in 1994 along with a reduced global coffeesupply resulted in an increase in Viet Nam's coffee export price, bringing increased benefitsfrom coffee production in comparison to the production of other crops. Quickly responding to

price signals, farmers in Dak Lak substituted production of coffee for that of other crops.

Figure 11 Coffee output by region

Source: GSO and Customs Department.

In the 1990-2000 period, the coffee plantation area in the province expanded greatly, byabout 14.1%/year. In Dak Lak in 2000, the income sources of large households were quitevaried, including coffee, pepper, cashew and sugarcane.9 By the year 2000, the coffeeplantation area in Dak Lak had reached 260,000 ha, of which 88.40% was on basal soil(223.34 thousand ha), and 11.60% on other kinds of soil. Coffee now accounts for 57.43% ofagricultural land in Dak Lak and 86.24% of the perennial industrial crops area in the

8Phan Quoc Sung, 1995, pp.10-14.

9 Nguyn Vn ng, May 2000.

Figure 10 Coffee-growing area by region

Dak Lak

53%

SoutheastRegion

33%

North +

South

Central

Coast

1%

Central

Highlands

(excluding

Dak Lak)

13%

Northeast +

Northwest

0%

Dak Lak

50%

Southeast

Region

34%

North +

South

Central

Coast

3%

Central

Highlands

(excluding

Dak Lak)12%

Northeast +

Northwest

1%


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province, and Dak Lak has become one of the biggest coffee-specialised regions in thecountry, accounting for 50% of total area and 53% of national output (see Figures 9 and 10).

However, the increase in coffee production in Dak Lak hasbeen extensive rather than intensive (see Table 2). In the1990-2000 period, coffee output growth was 30.4%/year,of which two-thirds was due only to expansion of the areabeing planted to coffee.

The average coffee yield in Dak Lak is about 2.45 tons/ha.However, as this study concentrated on poor householdswith limited ability to access and apply coffee productiontechnology, the average coffee yield revealed in the quantitative survey is lower than theaverage yield for the province as a whole. Most of the surveyed households use seedlings toplant coffee, which is a low-yield method, while shade trees are planted but are generally tooshort to shade all the coffee trees. There is no significant difference in coffee yield amonghousehold groups in the same district, but there is a large gap amongst different districts

(1.9 tons/ha in Cu Mgar versus 1.6 tons/ha in Buon Don and just 1.1 tons/ha in Lak).

The fall in the export price of coffee has led to a reduction in the farm gate price, which hit arecord low in the last two years. In Dak Lak, the price of dry coffee bean type RI 10 fell fromVND 11,500/kg in January 2000 to VND 9,100/kg in July 2000, and further to VND 4,000-4,500/kg in the first two weeks of December 2000, an overall reduction of 62%. Compared toJanuary 1999s level of VND 20,500-21,000/kg, the coffee price fell by 80%.11 (Fresh coffeeprices and dried coffee prices are equal to one-fifth and one-half of the coffee bean price,respectively; see Table 14). With coffee prices fluctuating, export companies are not willingto store as much coffee as they had previously, further reducing demand.

2.3.3 Production costs

Production costs are dominated byfertiliser. The amount of fertiliserused by coffee farmers increasesaccording to the age of the plant andalso depends on farmers' incomesand the coffee price. Productioncosts also include pesticides andirrigation, and depend on the qualityof land, amount of water available,and cultivation practices, amongother factors. During high-price periods, with coffee the main income source, all coffee

producers are encouraged to invest strongly in new plantations and maintenance of currentplantations, though farmers in districts such as Cu Mgar which are well-suited for coffee-growing invest more and gain higher productivity than do farmers in Buon Don and Lak. Onaverage, coffee bean production costs are VND 8,820.9/kg in Cu Mgar, VND 8,649.4/kg inBuon Don and VND 6,982.9/kg in Lak (see Table 3), while the selling price, already low forseveral years, dipped to VND 4,000/kg, or just half the cost of production, in early 2002.12

The comparative advantage for coffee production of the surveyed districts, as measured bythe Domestic Resource Cost (DRC) index, varies widely. The DRC index ranges from 0 to 1.The closer it is to 0 for a given region and product, the higher the potential added value ofthe product in that regionin other words, the greater the district's comparative advantage

10Coffee export enterprises sort beans by size, weight, and colour into three grades: R1, R2 and R3.

11ICARD figures.

12Figures calculated from survey.

Table 2 Increasing yield, areaand output of Dak Lak coffee,

1990-2000

% increase

Yield 7.0

Harvested area 23.4

Output 30.4Source: ICARD.

Table 3 Average production costs and DRC index forDak Lak coffee, 1994-1999

DistrictProduction costs(VND/kg of coffee

beans)

Productivity(ton/ha)

DRCindex

Cu Mgar 8,820.9 1.9 0.300

Buon Don 8,649.4 1.6 0.325

Lak 6,982.6 1.1 0.628Source: In-depth quantitative survey, Dak Lak, March 2002


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for the product. The DRC for coffee is 0.3 in Cu Mgar and 0.325 in Buon Don, but doublethis in Lak0.628. Lak's higher DRC index reflects the fact that its relatively lower coffeeproduction costs are not enough to make up for its unfavourable land and water conditions.

2.3.4 Processing and export of Dak Lak coffee

Figure 12 Coffee processing

The number of households processing coffee themselves is relatively low. None of thecoffee-producing households in Lak process coffee themselves. Those households in CuMgar and Buon Don which process coffee mainly utilise the dry processing method. This

method is very simple, with only one main stage of drying the fresh berries under the sunand then removing the husks using a hulling machine to produce the green coffee beans.This method has a low production cost (about VND 100,000/ton) but produces an unstable

Fresh berries

Wet processing Dry processing

Collectin beans from mature berries Collecting beans from mature berries)

Categorising according to size Drying coffee beans

Cleaning

Categorising freshly cleaned coffee by weight

Soaking to ferment

Cleaning

Rinsing

Drying

Dried coffee Dried coffee

Removing extraneous matter

Cleaning

Polishing coffee beans

Finished coffee beans

Categorising (size, weight, colour)

Coffee powder


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and generally low-quality product, because the longer the coffee is dried under sun, theworse its taste. Another factor reducing quality is that the longer the rainy season lasts, thehigher the "black nut ratio" or prevalence of fermented nuts. Export enterprises usually needto reprocess this coffee at an estimated cost of VND 48,000/ton.

Most households sell their dry-processed coffee to private middlemen, who use either "kongnong (small locally-made tractors) or lorries to transport it. On average, the cost oftransportation by kong nongis lower than by lorry, and the latter can only be used on better-quality transport routes. Off-road routes increase transportation costs in other ways, though,especially in the rainy season. Around 44% of surveyed enterprises revealed that bad roadsare their biggest problem, and 12.5% gave bad roads as their reason for using smaller andsimpler transportation means. Bad roads are the main reason that transportation for coffeepurchasing is more expensive (at VND 1,750/ton/km) than for selling coffee to exportcompanies (at VND 1,625/ton/km).

Figure 13 The coffee chain in Dak Lak 2001: from producers to exporters

Coffee export enterprises purchase, re-process and sort coffee beans by size, weight andcolour into three grades: R1 (accounting for 44.5% of their beans), R2 (50.7%) and R3(4.8%). (Some foreign customers do not buy coffee that has been sorted into the threegrades, preferring to purchase coffee in one mixed category and then reprocess it afterimportation.) A small proportion of these coffee beans (about 3-6%) is then processed intocoffee powder by private enterprises for domestic consumption. Dak Lak processing

companies mainly use the dry processing method, at a cost of about VND 148,200/ton.Some enterprises still utilise processing technologies from the French colonial period, butgenerally only for reprocessing and resorting.

Table 4 Coffee transportation costs, 2001Transportation

meansStep in the commodity

chainAverage distance

(km)Unit cost

(VND/ton/km)Total cost(VND/ton)

Auto Purchasing coffee 14 2,000 28,000

Kong Nong Purchasing coffee 8 1,500 12,000

Auto Selling to export enterprises 22 1,625 35,750

Auto Exporting via Sai Gon Port 350 1,500 52,500Source: Commodity chain survey, Dak Lak, March 2002.

Coffeegrowers'products

include freshcoffee, dried

100%

0.1%

(VND 5,784/kg)

(VND 30,000/kg)

94%

7%

93%(VND 2,587/ kg)

Privateassemblers'

products includecoffee beans

World market: categorisecoffee beans into R1, R2

and R3

Export at GIF price

Export FOB atSaigon port

Domestic marketuses coffee powder

(VND 2,587/kg)

(VND 4,192/kg)

6%

(VND 5,784/kg)

99.9%

Source: Commodit chain surve , Dak Lak, March 2002.

Direct processing/exporting

enterprisescategorise coffee

beans


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Transportation costs from Dak Lak to Sai Gon Port (a distance of 350 km) are on averageVND 1,500/ton/km, including accommodation fees for drivers and other informal costs (seeTable 4). Around 94% of Dak Lak's coffee beans are exported through this port.

The present system of pricing does not give adequate incentives to households and privatebusinesses to improve the quality of beans for export. Exporters do not pass on marketinformation or price differentials to middlemen. This situation differs with wet processing(Figure 13),13 used by only two companies in Dak Lak. This method produces higher-qualitycoffee with a higher value, thus helping stabilise export channels, but requires a higherinvestment (about VND 670,000/ton) as well as waste treatment measures to preventpollution.14 Moreover, coffee beans for wet processing must be of a similar size, colour, andweight. Export companies using wet processing methods buy fresh coffee directly fromcoffee producers who must ensure that their production activities meet exporters' technicalrequirements (for example, the ratio of mature berries must be 90%, activities such aswatering, fertilising and harvesting must follow company requirements, and so on). Wetprocessing capacity facilitates co-operation among farmers in co-operatives andautonomous communities because it requires activities such as crop maintenance or

harvesting to follow similar techniques and timing. In general, the export price for wetprocessed coffee is US$100/ton higher than that for dry processed coffee, while the farmgate price for wet processing is also VND 400-600/kg higher than that for dry processing, butthe export price changes daily according to market signals, as does the farm gate price.

However, coffee berries for wet processing are only produced in areas where companieswith wet processing chains have made investments. The main reason is that wet processingtechnology requires a large amount of capital.

Figure 14 The wet processing coffee chain in Dak Lak

13MARD has proposed that the government provide some incentives for enterprises to invest in wet processing

technology at a preferential interest rate of 3%.14

Nguyn Quang Th, 1999.

Households

Smallprivatebu ers

Communeagents

Districtagents

Exportcompany (dryprocessing)

Buy fresh berries

Sell fresh coffee ordried beans, or

repay debtPrimarily process,

categorise

Exportcompany (wetprocessing)

Buy dried coffee beans

To HCM City

Wet processed coffeeexport price is

US$100/ton higher

Export markets

To HCM City

Grow and harvestaccording to

company

requirements

Price difference in eachtransaction: 50-100 VND/kg

Farm gate price is400-600 VND/kg

higher

Invest inprocessing

technology

Source: Quantitative research, Dak Lak, March 2002.

Build coffee-growingzones, joint-venture


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Chapter 3 Stakeholders in the local coffee market

3.1 Households in the survey area

Table 5 summarises the characteristics of households in the surveyed communes divided

into groups according to wellbeing. Characteristics were identified by communes andvillages, rather than being taken from official surveys or pre-determined, and then cross-checked in interviews with households and focus group discussions with women.

Table 5 Comparison of wellbeing ranking characteristics by districtHousehold

groupCu Mgar district

(Ea Pok commune)Buon Don district

(Ea Nuol commune)Lak district

( Dak Phoi commune)Richhouseholds

Concrete house Motorbike, tractors, water

pumps 1-3 ha of coffee; have

planted coffee for a numberof years

Hire labourers

Have funds; access to loans;some have special incomesources (from relativesoverseas)

Know how to take care ofcoffee; have access toinformation

Children have higheducational level

Concrete house Tractors, water pumps

Have land of 1-3 ha;favourable land (good soil,near water source)

Have workforce

Have funds

Received and appliedtechnological inputs onplantations

Children have higheducational level/have notquit school

Cattle; some have fishponds/VAC

Trading

Enough food Have high educational level Crop diversification

Concrete house Tractors; television

1 ha land; have manyfields

3-5 labourers

Have pension; haveaccumulated wealth inhigh coffee price periods

Know how to invest

Children graduated from7

thor 8

thclass

3-4 cattle; 1-2 pigs

Trading Enough food

Still keep coffee plants

Mediumhouseholds

Small concrete house Motorbikes, water pumps

7-8 sao15

of coffee; 1 ha ofland; less land

Newly set-up family

No funds Less access to information

Have funds to bring childrento school; some children quitschool

Good house with cattle Tractors

1-2 ha land

No/fewer labourers; manychildren; some sick people

No funds Have poor production

techniques

Lack food for 2 months

Some raise 1-2 pigs Some had a television

(but sold already) 3 saoor 1 ha of land,

less flat land; less coffee Many children; fewer

than 3 labourers Debt; earn a salary Do agricultural

production activities


Poorhouseholds

Unfertile soil, low coffeeproductivity; less than 4-5coffee sao; less than 1 haland

Many children

Temporary house

No water pump; some have

Recently separated fromparents with no land; lessland (5 sao-1 ha), low qualitysoil; hire land (VND 100-120,000/sao)

Many children;disability/illness; newlymarried; old, less labour

No house/temporary andsmall house

Only simple production tools

Less land, under 3-4sao; plant less coffee,many trees don't grow;less water paddy area(about 0.5-1.5 sao)

Many children; newlymarried

Low-roofed house

No television

151 sao= 1000 m

2


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Householdgroup

Cu Mgar district(Ea Pok commune)

Buon Don district(Ea Nuol commune)

Lak district( Dak Phoi commune)

television; some havemotorbike

Very hungry for severalmeals/month; some are veryhungry right beforeharvesting

Not provided with short-termloans, must borrowunofficially; no funds forinvestment

High ratio of children quittingschool


Poor ability to applytechnologies; do not knowhow to invest even if havecapital

Very hungry for 6 months

Don't raise animalsExtremelypoorhouseholds

Newly married, or recentlyseparated from parents;single; many children;

perennial illness Low-roofed house Less coffee area, low quality

soil; no or less land

Nobody instructs them inworking ways

Unable to borrow money No motorbike; no working

tools Children stay at home

No rice for 1-2 months

Widow, many children;single; newly separated fromparents

Low-roofed house Less land (under 5 sao);

some just bought coffee landwhen price reduced

Poor technologyapplication/don't want toapply

No funds No assets

Some still bring children to

school (mainly primaryschools)

Lazy

Fewer labourers; manysmall children; disabled

Cottage Less coffee area; less

land, less than 2-3 saoofunfertile land; plant lesscoffee; unirrigated land

No knowledge ontechnological advances

No funds No television

Very hungry for 9 months Don't raise animals

Source: Qualitative survey, Dak Lak, March 2002.

In general, poor or hungry households inDak Lak may: (a) have scarce or poor-quality land, (b) have many smallchildren, meaning less available labour,(c) have relatives who have been sickfor a long time, (d) be newly establishedas households (and consequently have

less savings), (e) be unable to earn aliving (with limited ability to apply newtechnology), or (f) be female-headed.These households often have temporaryor low-roofed cottages and low-valueassets (no televisions, motorbikes,tractors or water pumps). They do not raise pigs or cattle, and may have many children whohave been forced to leave school early (most of their children will only graduate from primaryschool). They often work for others to earn their living. All these factors mean they have lessaccess to bank loans. The characteristics of poor and hungry ethnic minority people in DakLak are not very different from those of other poor people throughout the country asdescribed in numerous reports.

A low-roofed house is typical of the poorin Cu M ar district


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3.2 Coffee-growing households

Households which produce coffee on a small scale (about 1 ha per household) comprise themajority of coffee-growing households in Dak Lak. These households, including both Kinhand ethnic minority people, respond to market signals in making their production decisions.

Until recently, high coffee prices encouraged them to expand their production area byreclaiming wasteland and cutting down forest land. Family is their main source of labour,while their capital is obtained through bank loans and other sources. In favourable areas(with good soil, flat land, a stable water source, favourable transportation conditions, and soon) and in specialised coffee-growing regions, coffee is the main income source, so thehouseholds in this group allocate most of their resources to planting coffee. In lessfavourable areas, agricultural production is more diversified with a lower level of investmentand less intensive coffee production.

Households which produce coffee under contract with state farms and companies comprise10-15% of all coffee-producing households in the province. These households enjoy anumber of benefits under their contracts but also have obligations. They usually receive a

certain amount of in-kind support such as fertiliser, seedlings, and irrigation; somehouseholds receive a monthly salary. However, they have to use their own labour, and mayhave to invest in more fertiliser or other inputs than are provided by the contractor.

Finally, there are thousands of households in the province which produce coffee on a largescale, at least several hecta. Since the research team concentrated on the poor, this groupwas not analysed in depth.

Except for households contracted to state farms, almost all coffee-producing households selltheir produce to local private middlemen. These households get no support from thegovernment and are not involved in contracts to sell their coffee to processing and exportingcompanies.

3.3 Ethnic minority women

Unlike the Kinh, ethnic minority people in Dak Lak (i.e., the E De, MNong, and other ethnicminority groups) follow a matriarchal system. The typical work division between husbandand wife is summarised in Table 6.

Ethnic minority women do almost all the housework, including strenuous work such aschopping and carrying wood. Most other heavy work, and most coffee plantation work, isdone by men, though women help their husbands when needed. Children's work follows aninformal split with sons helping fathers and daughters assisting mothers. Widows or

women with sick husbands have to do all the work themselves, including such tasks aspesticide spraying.

Decisions to buy production and household materials and sell coffee are based onagreements between husband and wife. If the wife does not agree, the husband will not actalone, showing that the wife is not only the money keeper. However, gender equalityremains very hard to attain, even in matriarchal communities. Although women play animportant decision-making role when dealing with family assets, most important decisionsrequiring technical knowledge, such as cutting back coffee trees, diversifying crops orborrowing money, are the responsibility of men. The main reason for this, according toethnic minority women, is that husbands know more than wives do, because husbandshave a higher educational level and can grasp more information. The red book of land

certification is registered under the name of the man (men are still considered to be thehousehold heads), generating contradictions: inequality in land control between men and


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women is enshrined in these books, but according to the matriarchal system, ethnic minoritywomen are the main inheritors in the family.

Table 6 Gender divisions in work and decision-making in ethnic minority families

Activity Wife Husband

Housework

Cooking, washing

Taking care of children

Chopping/carrying firewood, carrying water

Coffee plantation work

Digging holes Helps husband

Planting coffee seedlings

Weeding Helps husband

Fertilising Helps husband

Watering

Spraying pesticides

Making brooms, breaking off driedbranches, cleaning coffee gardens

Harvesting coffee

Transporting, loading

Protecting products Some

Drying coffee

Other work

Fishing

Harvesting vegetables and young bamboo

Working for others

Decision-making

Purchasing materials Selling coffee

Buying assets, machines

Cutting down coffee trees

Planting other crops

Borrowing from banks Don't know

Borrowing from others Source: Discussions with women's groups in Ea Sut and Lang villages, Ea Pokcommune, Cu Mgar district, March 2002.

Women also suffer in education, where in case families lack money for sending children to

school, girls must be the first to stay at home to help with the housework. There werealmost no ethnic minority women leaders in the survey areas, except for Womens Unionofficials (only men hold the position of village head and take part in commune leadership).The reasons as perceived by the ethnic minority women themselves are that they are low-educated, and they are very busy with housework. One encouraging sign is that there havebeen some ethnic minority women working as primary school teachers recently.

3.4 Private middlemen and coffee export businesses

Private middlemen purchase over 90% of farmers' coffee. Big communes generally have agroup of middlemen who purchase coffee from households. Price differences betweenvarious middlemen are about VND 50-100/kg; the middlemen gain their margins mainly from

primary processing (removing extraneous matter, rubbing and polishing) and sorting. Thekey task of the middlemen, however, is transportation of coffee from producers toprocessing/exporting enterprises. Neither households nor middlemen use wet processing


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methods because of the high costs involved. Many private middlemen (over one-third ofsurveyed firms) have received loans from banks, at an average of VND 600 million.

Coffee export businesses have established networks with many district agents and someaffiliated middlemen; district agents have their own networks in coffee-producing communes.Once contracts are signed with foreign customers, these businesses will often pay 80-90%,or even 100%, in advance for agents to purchase coffee (without payment in advance,agents might not abide by contracts should prices change).


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Chapter 4 The impact of coffee production and trade on Dak Lak

4.1 The impact on livelihoods

4.1.1 Changing living standards

High coffee prices from 1995 to 1999 helped to reduce poverty in the coffee-growing regionsof the surveyed districts of Dak Lak.16 Local people purchased many assets during thisperiod. On average, about 70% of surveyed households now own bicycles, 45% televisionsets, and 25% motorbikes and "tricycles" or tractors (see Table 7).

Table 7 Ownership of various assets by district (%)

DistrictAssets Total

Cu Mgar Buon Don Lak

Electricity 99.1 99.7 98.7 98.8

Bicycle 69.0 71.9 75.8 57.5

Radio 54.3 70.0 72.6 37.1

Television 45.9 47.3 42.5 48.3

Motorbike 25.8 27.8 24.0 25.5

Tractor 25.0 22.4 30.8 21.2

Water pump 24.2 24.3 28.6 18.9Source: Broad-based quantitative survey, Dak Lak, March 2002.

However, the decline in coffee prices since this period has to some extent reversed thistrend. As concluded by one farmer, the rich have become medium-off people, the medium-off the poor, and the poor have fallen into hunger... On average, 45% of coffee-growinghouseholds now lack adequate nourishing food, including rice, 66% have bank debts, and45% have members who have turned to selling their labour to earn money (see Table 8).

However, the impact of declining coffee prices is different among different types ofhouseholds (see section 4.2).

Table 8 Difficulties of households by district (%)

DistrictDifficulty Total

Cu Mgar Buon Don Lak

Have debt from bank 66.0 78.6 68.0 48.3

Work as hired labourers 45.7 38.5 47.9 51.9

Lack food 45.0 36.0 36.6 65.9

Have debt from traders or middlemen 6.6 0.0 11.0 9.5Have debt from mass organisations(Women's Union, Farmers' Union) 4.8 8.5 1.6 4.2

Source: Broad-based quantitative survey, Dak Lak, March 2002.

4.1.2 Increasing population density

Coffee production requires a large amount of labour, as much as 240-250 person-days/ha.High coffee prices and subsequent coffee farm expansion opened an active labour market incoffee-growing areas, and led to a local labour shortage, especially during the harvest.Responding to market signals, tens of thousand of labourers moved from different regions(including northern ethnic minority areas) to the Central Highlands. The number of migrantspeaked in the early 1990s, dropping slightly when local authorities implemented some

16A survey of poor households showed that according to the old criteria of Department of Labour, Invalids and

Social Affairs of Dak Lak Province, the poverty incidence in 2000 decreased greatly compared to the previousyear, falling to only 8.69%, but according to the new government criteria, the incidence actually rose to 25.55%.


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measures to restrict free migration and when coffee production levels declined (see Figure15).

Figure 15 Migration to Dak Lak, 1976-2000

Source: Resettlement Committee of Dak Lak, 2000.

Massive migration waves have changed the population structure of Dak Lak. The populationdensity increased from 17 people/km2 in 1975 to 61 people/km2 in 1995 and is presentlyaround 94 people/km2.

4.1.3 Food insecurity

Coffee-producing households remember that when coffee prices were high, one kg of coffeebeans could be exchanged for five or more kg of rice; there were no worries about food then,since "the higher the income, the stronger the consumption." Since coffee prices began todecline, the in-kind value of one kg of coffee beans has dropped to just over one kg of rice,and coffee farmers have begun to face food insecurity. The problem is even more serious forpeople who have not been able to save, including many ethnic minority people.

Households have tried to deal with food insecurity in a variety of ways. Some have reducedthe number of meals they eat in a day. Others have changed the types of food they eat,eating rice porridge or supplementing food with cassava and maize, strategies that areparticularly common in coffee monoculture areas. Some have benefited from the support oflocal authorities, who since the end of 2001 have been providing occasional food donations.Households have also given a higher priority to rice and other crops, yet very limited paddyland and inadequate irrigation means only one crop per year can be harvested in many

places. Ethnic minority people are particularly at risk as they do not have the custom of wetpaddy cultivation.

Table 9 Differences between food-shortage and food-sufficient households

Household typeAverageland area

(ha)

Average debt(all households)

(VND million)

Average debt(borrowing

households only)(VND million)

% of householdshiring their labour

Food-shortagehouseholds

1.06 1.10 1.69 73.9

Food-sufficienthouseholds

1.55 2.42 3.02 22.7

Source: Broad-based quantitative survey, Dak Lak, March 2002.

4.1.4 Reduced school atte

the impact of the global coffee trade on dak lak province, viet nam: analysis and policy...

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