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

THE IMPACT OF THE GLOBAL COFFEE TRADE ON DAK LAK PROVINCE, VIET NAM:

ANALYSIS AND POLICY RECOMMENDATIONS

Final Draft

September 2002

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Contents

Acronyms and abbreviations.. v Acknowledgements.. vi Chapter 1 Introduction ......................................................................................................... 1

1.1 Justification and objectives of the research ................................................................... 1 1.2 Research sites ............................................................................................................... 1 1.3 Research methodology .................................................................................................. 2

1.3.1 The team............................................................................................................ 2 1.3.2 Qualitative research ........................................................................................... 2 1.3.3 Quantitative research ......................................................................................... 3

1.4 Limitations of the research............................................................................................. 4 1.5 Structure of the report .................................................................................................... 4

Chapter 2 The coffee market: global to local ..................................................................... 5 2.1 The global coffee market ............................................................................................... 5

2.1.1 The coffee trade in the 20th century ................................................................... 5 2.1.2 Coffee consumption ........................................................................................... 6 2.1.3 Production and trade today ................................................................................ 6 2.1.4 Attempts to stabilise the world coffee price........................................................ 7 2.1.5 The future........................................................................................................... 8

2.2 Viet Nam and the global coffee market.......................................................................... 8 2.2.1 A rapid increase in coffee cultivation.................................................................. 8 2.2.2 Coffee: a key export ........................................................................................... 8 2.2.3 Low domestic consumption................................................................................ 9 2.2.4 Tight links with the global economy ................................................................... 9 2.2.5 Admission to the WTO ..................................................................................... 10 2.2.6 The Vietnamese coffee market and TNCs ....................................................... 10

2.3 Coffee production in Dak Lak province ........................................................................ 11 2.3.1 Society, economy, and environment ................................................................ 11 2.3.2 An increase in coffee production...................................................................... 12 2.3.3 Production costs............................................................................................... 13 2.3.4 Processing and export of Dak Lak coffee ........................................................ 14

Chapter 3 Stakeholders in the local coffee market ......................................................... 17 3.1 Households in the survey area .................................................................................... 17 3.2 Coffee-growing households ......................................................................................... 19 3.3 Ethnic minority women................................................................................................. 19 3.4 Private middlemen and coffee export businesses ....................................................... 20

Chapter 4 The impact of coffee production and trade on Dak Lak ................................ 22 4.1 The impact on livelihoods ............................................................................................ 22

4.1.1 Changing living standards................................................................................ 22 4.1.2 Increasing population density........................................................................... 22 4.1.3 Food insecurity................................................................................................. 23 4.1.4 Reduced school attendance............................................................................. 23 4.1.5 Changing income sources................................................................................ 24 4.1.6 Indebtedness.................................................................................................... 27 4.1.7 Insufficient capital............................................................................................. 28 4.1.8 The need for cash and even lower selling prices ............................................. 29 4.1.9 A new need for (weak) extension services....................................................... 30 4.1.10 Limited benefits from input-support programs.................................................. 30 4.1.11 Price information: less relevant, less accessible.............................................. 31 4.1.12 Deforestation.................................................................................................... 31 4.1.13 Land shortage .................................................................................................. 32 4.1.14 Water resources............................................................................................... 33

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4.2 A look at the stakeholders............................................................................................ 33 4.2.1 The impact on coffee monoculture households ............................................... 33 4.2.2 The impact on diversified households.............................................................. 34 4.2.3 The impact on the poor .................................................................................... 34 4.2.4 The impact on ethnic minorities ....................................................................... 35

4.3 Coping strategies ......................................................................................................... 36 4.3.1 Coping strategies of the rich ............................................................................ 36 4.3.2 Coping strategies of medium-off and poor households.................................... 37

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

5.1 The impact of current policies ...................................................................................... 39 5.1.1 Increasing coffee production ............................................................................ 39 5.1.2 Temporary storage........................................................................................... 40 5.1.3 Encouraging exports ........................................................................................ 40 5.1.4 Providing subsidies .......................................................................................... 41 5.1.5 Extension policy ............................................................................................... 41

5.2 Potential impact of future policies ................................................................................ 42 5.2.1 Reducing area planted to coffee ...................................................................... 42 5.2.2 Increasing farm gate prices.............................................................................. 43 5.2.3 Increasing productivity ..................................................................................... 43 5.2.4 Foreign exchange policy .................................................................................. 44 5.2.5 Narrowing the price gap between Viet Nam and other countries..................... 44

Chapter 6 Conclusions and Recommendations .............................................................. 45 6.1 Conclusions ................................................................................................................. 45 6.2 Recommendations....................................................................................................... 46

6.2.1 Key policy recommendations ........................................................................... 46 6.2.2 Strengthening support to farmers..................................................................... 48 6.2.3 Improving competitiveness............................................................................... 49 6.2.4 Strengthening poverty reduction ...................................................................... 50

References. 52 Annex 1: Research sites 53 Annex 2: PAM Framework. 56 Annex 3: Econometric Models. 59

Tables Table 1 Transnational coffee companies and their affiliates..................................................11 Table 2 Increasing yield, area and output of Dak Lak coffee, 1990-2000 .............................13 Table 3 Average production costs and DRC index for Dak Lak coffee, 1994-1999 ..............13 Table 4 Coffee transportation costs, 2001.............................................................................15 Table 5 Comparison of wellbeing ranking characteristics by district .....................................17 Table 6 Gender divisions in work and decision-making in ethnic minority families ...............20 Table 7 Ownership of various assets by district (%)..............................................................22 Table 8 Difficulties of households by district (%) ...................................................................22 Table 9 Differences between food-shortage and food-sufficient households ........................23 Table 10 Income from coffee and as a percentage of total household income by district and

household type, 2001 (VND million) ..........................................................................25 Table 11 Agricultural land use by district (ha/household) ......................................................25 Table 12 Other income sources of coffee producers.............................................................25 Table 13 Debt by household type and source (VND million) .................................................27 Table 14 Average selling price of coffee by household type, 2001 (VND/kg)........................30 Table 15 Coffee purchasers by household type, 2001 (%)....................................................30 Table 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...................................41 Table 18 Export price (US$/ton) of Vietnamese coffee as a function of changes in coffee

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

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

Figures Figure 1 Sustainable livelihoods framework ............................................................................2 Figure 2 World coffee price fluctuations, 1982-2002 ...............................................................5 Figure 3 World coffee output and exports................................................................................6 Figure 4 Coffee output of five countries, 2001 (million tons) ...................................................6 Figure 5 Market share of major coffee producers, 2001..........................................................9 Figure 6 Main importers of Vietnamese coffee, 2001 ..............................................................9 Figure 7 Domestic, export and world coffee prices,19902001 (US$/ton) ............................10 Figure 8 Market share of green coffee by TNC, 1998 ...........................................................10 Figure 9 Market share of roasted and instant coffee by TNC companies (1998) ..................11 Figure 10 Coffee-growing area by region ..............................................................................12 Figure 11 Coffee output by region .........................................................................................12 Figure 12 Coffee processing..................................................................................................14 Figure 13 The coffee chain in Dak Lak 2001: from producers to exporters...........................15 Figure 14 The wet processing coffee chain in Dak Lak .........................................................16 Figure 15 Migration to Dak Lak, 1976-2000 ..........................................................................23 Figure 16 Comparison of average debt of food-shortage versus food-sufficient households29 Figure 17 Differences in land area between food-shortage and food-sufficient households ....32 Figure 18 Drop in investment for fertiliser..............................................................................36 Figure 19 Vietnamese coffee export volumes and prices, 1990-2001...................................39 Figure 20 Export revenue and elasticity of demand ..............................................................40 Figure 21 Storage policy holds back the speed of price reduction rather than increasing

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

Boxes Box 1 No money for shoes ....................................................................................................24 Box 2 Banks are also in trouble .............................................................................................27 Box 3 Using a loan for a non-productive purpose makes repayment difficult ........................28 Box 4 Middlemen with non-performing loans are also in a precarious position.....................29 Box 5 No money to apply extension lessons .........................................................................30 Box 6 Lower access to in-kind loans for the poor ..................................................................31 Box 7 The perennially poor" lack land ..................................................................................32 Box 8 No buyers for the farm!................................................................................................33 Box 9 Poor monoculture households suffer...........................................................................34 Box 10 The better-off are not very affected by low coffee prices...........................................34 Box 11 A poor ethnic minority household follows extensive cultivation .................................35 Box 12 Richer households keep their trees and hope ...........................................................36 Box 13 The poor still rely on coffee and cling to the hope of a better life ..............................37 Box 14 Cottona way out for coffee producers? ..................................................................38

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Acronyms and abbreviations

ACPC The Association of Coffee-Producing Countries Danida Danish bilateral aid agency DARD Department of Agriculture and Rural Development DRC domestic resource cost EPC effective rate of protection coefficient EU European Union FAO Food and Agriculture Organisation GDP gross domestic product GSO General Statistics Office HCM City Ho Chi Minh City ICA International Coffee Agreement ICARD Information Centre for Agricultural and Rural Development ICO International Coffee Organisation MARD Ministry of Agriculture and Rural Development NEZ New Economic Zone NPCI nominal protection coefficient of input NPCO nominal protection coefficient of output OGB Oxfam Great Britain OHK Oxfam Hong Kong PAM policy analysis matrix PRA participatory rural appraisal SOE state-owned enterprise TNC transnational corporation US United States VAC vuon-ao-ca (integrated garden and fish pond production system) VBARD Viet Nam Bank for Agriculture and Rural Development VND Vietnamese dong WTO 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 express our sincere thanks to officials of the Dak Lak DARD and of the districts, communes, villages and 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 officials who 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 especially the 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 the issue studied, this report may contain some errors. We warmly welcomes comments from readers.

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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, excessive production expansion may take place, which causes downward pressure on prices, ultimately putting those in the coffee industry into serious crisis. Price fluctuations increase the 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 the livelihoods of Vietnamese coffee producers, particularly in Dak Lak province, the largest coffee-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, while farmers, especially the poor, will continue to be the most vulnerable to them. The purpose of the research was to investigate: 1. Vietnamese coffee producers' living situation, desires, and reactions to the changes in

their industry, and the potential for them (and in particular the poor) to improve their living situation;

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

3. The policy changes needed to strengthen economic development and reduce the poverty 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, including poverty 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 Rural Development.

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After discussions with commune officials, three villages in each commune were chosen, with priority given to sites with a higher percentage of ethnic minority people. In total, nine villages were surveyed, including eight ethnic minority villages and one Kinh (ethnic Vietnamese) village. Over 90% of households interviewed were E De and M'nong ethnic minority people; therefore, most research results about households in this report are about ethnic minority households. 1.3 Research methodology 1.3.1 The team The research team was composed of 14 people from the Information Centre for Agricultural and Rural Development (ICARD) of the Ministry for Agriculture and Rural Development (MARD), the Department of Agriculture and Rural Development Policy, the Agricultural Economics 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 field work. 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), within which questions focused first on the livelihood outcomes of a number of households, and then 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 institutional analysis. Key issues examined included decision-making process trends on such topics as investment, 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 and M'Nong) and six were female-headed. Seventy-eight women in six focus groups were also interviewed. 2 Neefjes, Koos, Environments and Livelihoods: Strategies for Sustainability, Oxford: Oxfam (2000).

Vulnerability context

trends seasonality shocks

(in nature, environment, markets, politics)

Policies, processes and

structures laws, public

policies, incentives, regulations

private sector policy and behavior

civic, political and economic institutions (markets, culture)

Livelihood strategies

of social actors

(men, women, households, communities)

natural resource-based and/or market-based

diverse survival or

Livelihood outcomes

more income increased

wellbeing reduced

vulnerability improved

food security improved

sustainability of natural resources

non-use: values of nature secured

Livelihood capital

Physical

Natural resources

Social Financial

Human

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The research group met with 53 key informants, including: (a) village representatives, such as village heads, village elders, representatives of womens associations, and people with a substantial understanding of local livelihoods, (b) the leadership of the Dak Lak DARD, (c) employees of some enterprises specialising in processing, exporting and/or supplying inputs for coffee production, (d) commune-based middlemen, (e) representatives of the district branches of the Viet Nam Bank for Agriculture and Rural Development, and (f) leaders of all surveyed communes and districts. Information was collected on the coffee market chain and local enterprises, and on the processing and transportation characteristics of enterprises in the 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-economic map of the village, the research group randomly selected 50 households in each village to be wealth-ranked, rather than carrying out the exercise for all households. All qualitative information was cross-checked with the results of the quantitative household surveys, 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 and potential policies on a variety of factors, including the income levels of different coffee producer groups in Dak Lak, especially the poor. As with other models, PAM is based on a number of assumptions and binding conditions, and assesses the impact of a particular policy or policy change by holding other factors constant. Therefore, the conclusions drawn from the model are not flawless. But model-based assessments of trends and scales of change 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 the short term and the long term. Econometric models were used to estimate the relations between Vietnamese export price of coffee and the quantity of Vietnamese as well as Brazilian exports of coffee. Through these models, ones can derive the optimal quantity of coffee production for Vietnam that would maximize its export revenue. These results are useful information for policy-makers to decide how much area of land should be allocated to coffee plantation, and policy-makers then can implement different policies to achieve the targeted area. It should be notice that the estimations of econometric models are based mainly on the empirical data of 1994-2001 provided by General Statistics Office (GSO). In order to provide all necessary data inputs for the PAM model, two household surveys were undertaken: (a) an in-depth quantitative survey of 175 households chosen randomly from within each of the wealth-ranked groups in all surveyed villages; a detailed questionnaire was used to gather data on the coffee production and processing and consumption patterns of each wealth-ranking group; and (b) a broad-based quantitative survey of 891 households, including 318 in Cu Mgar District, 310 in Buon Don District, and 263 in Lak District. For this survey, a short, simple questionnaire was used to gather general information about the characteristics of coffee farmers in the three regions. Finally, a commodity chain survey was carried out with 18 enterprises in the coffee commodity chain (middlemen, processors, and exporters) in the three districts.

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Secondary documentation was also collected and analysed, including research documents relating to the coffee sector, information from newspapers and the internet, DARD information 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 the report, including: a general paucity of data, as well as inconsistencies in existing data from various

sources, on coffee production in general, Vietnamese coffee prices, and Viet Nam's competitors, especially over the long term. As a result, in a number of cases the quantitative assessment had to rely on assumptions or the recommendations of commodity experts in order to reach conclusions;

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

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

inexact information from villagers. People had difficulty recalling the amounts of inputs they 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 in the Annex. The second chapter describes the coffee market globally, in Viet Nam and in Dak Lak province, 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 coffee trade on coffee producers and others involved in coffee trading, and discusses some of the coping 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 quantitative analysis 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 20th century 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 a reduction in coffee demand and in coffee plantation areas. When economies stabilised after World War II, an increase in the demand for coffee resulted in higher prices, which encouraged 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 various International Coffee Agreements (ICA). At present, there are about 75 coffee-producing countries, mainly in South America, Africa and Asia, employing about 10 million labourers and 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$8.5 billion annually, with a record year reaching US$14 billion (for example, 1986) and a slow year just US$6 billion (for example, 1992-93). In the 1990s, high coffee prices encouraged producers to expand coffee production, especially in Brazil and Viet Nam. Between 1993 and 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 coffee cultivation area increased more slowly than the global average, at 0.76%/year, but its coffee productivity increased nearly twice as fast, at 5.36%/year; production increased at 8.27%/year. During the same period, Viet Nam's coffee cultivation area increased dramatically, 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% and 33% 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 largest exporting countries of Brazil and Columbia. A 1994 frost in Brazil killed or damaged a large proportion of Brazil's coffee trees, resulting in a global supply shortage and price surge in 1995. 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 prices fluctuate. 2.1.2 Coffee consumption While coffee production is mainly a developing-country activity, coffee consumption takes place primarily in developed countries such as the US, the EU countries, and Japan, and in newly industrialised countries such as Singapore and Malaysia. Consumption of coffee beans over the last 250 years has increased enormously, from 600,000 bags in 1750 to 94 million bags in 1995. While in the long term consumption is likely to continue to increase along with economic growth and the continuing improvement in global living standards, in the short term, consumption levels have proven to be, and likely will remain, quite volatile.3 Total 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 of Robusta was still relatively high at US$1,300/ton, but by January 2000 it had declined to US$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 increase production (see Figure 3). Brazilian coffee production was 1.96 million tons, an increase of 7.1% over 2000, while production in Viet Nam and Colombia reached 847 thousand tons (a 9% 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 4.2 million 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 2001output exports

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 coffee exports by all the major exporters, led by Viet Nam with an increase of 24%, Colombia next with 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 3 German 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

Braz

il

Vietna

m

Colom

bia

Indon

esia

Guate

mala

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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 coffee consumptionjust 0.96%/year. This combination of oversupply and stagnant demand has strengthened downward pressure on the global coffee price; according to available figures for 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 coffee exporters, caused serious difficulties for coffee producers, and forced many countries to replace 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 levels beneficial to producers. In 1945, an International Coffee Agreement called FEDECAME was established 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 export quotas and control the exports of 15 Latin American countries, and in 1960, the IACO attempted to co-ordinate with African coffee-growing countries; however, neither effort was successful. In 1963, "the ICO was establishedat a conference [that had been] convened by the United Nations the previous year as a response to fluctuations in prices and supply and demand from the 1930s to the 1960s." The main original purpose of the ICO was to administer the International Coffee Agreement (ICA) that had been created in 1962 to set coffee 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 since then. These include the International Coffee Agreement 1968 (and its two extensions), the International Coffee Agreement 1976, 1983 (and its four extensions) and the Agreement of 1994 (with one extension) approved by the Council for a period of five years beginning 1 October 1994. The latest, the 2001 Agreement, entered into force provisionally on 1 October 2001." The ICO currently has 63 members from producing countries all over the world.4 The ICO is only a forum of coffee producers, however, with no power to control export quotas for coffee, and, as with any commodity agreement, has been prone to cheating and quota breaking.5 Since the decline of world coffee prices began in the early 1990s, producing countries have continued the effort to co-ordinate by setting up guidelines to temporarily reduce export volumes. These guidelines have been adopted by the ACPC, which includes 28 nations controlling 85% of world coffee production. In 1993, a number of countries co-operated to store 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 reduce supply. The implementation of this plan by a number of countries, both ACPC members and non-members, has had little effect on the price of coffee, however, so a further plan was put forward by ACPC to destroy 5% of poor-quality coffee. This plan has not yet been implemented. 4 Information and quotes from www.ico.org 5 Another 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 have served in part to distort market signals and widen the price gap between high-quality and low-quality coffee. Due to the lack of competition in the coffee market from developed countries, which are consumers 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 are applied: green coffee beans face few import tariffs. Furthermore, there are no import tariffs on processed coffee, whether roasted or instant, coming into the US. Processed coffee can enter the EU tax-free from many African, Caribbean and Pacific countries, as well as from many 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 an import duty of 3.1% on instant and 2.6% on roast and ground coffee, while Brazil and Thailand 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 unstable weather conditions in exporting countries have strongly influenced the supply of and demand for coffee. This has led to significant fluctuations in world coffee prices. Speculative activities in 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 is estimated that supply will continue to exceed demand in the near future. World coffee exports are expected to rise to 5.7 million tons while demand, not including demand for reserves, 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 area increased from several thousand ha in the early 20th century to 20,000 ha in 1975. From 1982 to 1988, the coffee production area was further expanded through investment from and co-operation with former socialist countries. By 1994, the total nation-wide coffee production area was 150,000 ha, or just 1.32% of Viet Nam's total crop area. In the late 1990s, this area began to increase much more rapidly, by an average of 20.7%/year, to 516.7 thousand ha in 2000, making up 4.14% of Viet Nam's total crop area, and making coffee the third most widely planted crop after rice (which accounts for 61.4% of total crop land) and maize (5.7%). Between 1980 and 2000, the Vietnamese coffee production area increased 23 times while output increased more than 83 times. 2.2.2 Coffee: a key export

One of the main reasons for the rapid increase in the coffee cultivation area was the sudden price 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 to US$2411/ton in 1995, due mainly to a severe frost in 1994 that substantially cut the coffee production of Brazil, the worlds biggest coffee producer. Viet Nam gained substantial export earnings at this time from coffee. Along with the increase in cultivation area, coffee became one of the most important export commodities of Viet Nam in the 1990s. Recently, its annual export value has ranged from US$400-600 million, providing between 6% and 10% of national export revenues. Viet Nam

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is now recognised as the second largest coffee exporter after Brazil, closely followed by Columbia and Indonesia (see Figure 5). Viet Nam has also become the worlds largest exporter of Robusta, providing 41.3% of the world market in 2001 (Robusta accounts for 99% of total coffee output in Viet Nam). However, during the first six months of 2002 there was a sharp reduction of around 30% in Vietnamese coffee exports compared with the same period in 2001.

Figure 6 Main importers of Vietnamese coffee, 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 recent years, including diversifying trade relations with the region and the world,6 signing a bilateral trade agreement with the US, and accelerating its accession to the World Trade Organisation (WTO). However, the expected impact of trade liberalisation in terms of tariff reductions by importing countries will not have a great effect on the Vietnamese export market, because tariff reductions are already large and anyway these countries generally have 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 30,000 tons/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, the Vietnamese coffee sector has become closely linked with the world coffee trade. Export and domestic prices have reflected world price fluctuations. The difference between Vietnamese export 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 as large potential markets.

Figure 5 Market share of major coffee producers, 2001

EU66%

United States17%

Other8%

Singapore5%

Japan4%

Brazil25%

Vietnam16%

Colombia11%

Other29%

Indonesia6%

Guatemala5%

India4%

M exico4%

10

Figure 7). In fact, Viet Nam's coffee trade is relatively more liberalised than its trade in other agricultural products. Until now, Viet Nam's coffee-related trade policy has been geared toward further liberalisation. Every enterprise now has the right to buy, sell and process coffee for export as well as domestic consumption. In recent years, the level of the coffee export tax has been reduced to 0% (zero per cent). The world coffee price has clearly had a direct and immediate influence on Viet Nam's export price 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 the Vietnamese coffee sector to a number of new challenges as well, as international regulations do not allow the application of many of the policies Viet Nam uses to support the coffee industry. When markets are more closely linked, every price fluctuation in the world market will rapidly be reflected in the domestic market, causing bigger changes in farmers prices and incomes. Traders may also face a number of difficulties since the implementation of trade commitments means fiercer competition with foreign enterprises, even at the first stage of assembling agricultural products for processing. 2.2.6 The Vietnamese coffee market and TNCs With a history of a state monopoly in coffee export, and the recent increase in involvement of the private sector, it is difficult to get a clear picture of the degree of transnational corporation (TNC) activity in the Vietnamese coffee market. However, it is known that Neumann and Volcafe, which dominate the international coffee trade (in 1998 they controlled 29% of the market), are very active in Viet Nam, as are a number of other TNCs. Roasters rely on international coffee traders to supply very large amounts of beans at short notice. At the same time, due to technological advances, the traders are able to vary their source of green coffee, since instant coffee can now use a variety of beans rather than a single source to ensure taste and blend. These factors, together with the large stocks in countries such as Viet Nam and Indonesia, mean that TNCs can play producers in the region against each other to ensure the best possible prices. The low price of Vietnamese coffee, and Vietnamese exporters' limited knowledge of the international market, further increase the control of international traders over contract terms for coffee quality and price.

Figure 7 Domestic, export and world coffee prices,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 green coffee by TNC, 1998

Neuman16%

Volcafe13%

Cargill6%

Esteve6%

Aron5%

Dreyfus3%

Others44%Mitsubishi

3%

Man4%

11

Roasters such as Nestl and Philip Morris are now able to source coffee at increasingly lower prices while ensuring that consumers continue to pay high prices for an ever more elaborate array of luxury instant coffees and speciality blends. Figure 9 shows the level of control by just a few powerful players in the roasted coffee market. Philip Morris, Nestl, Procter & Gamble, and Sara Lee control 63% of the instant and roasted coffee markets with brands such as Maxwell House, Nescaf, Folgers, and Douwe Egberts. Nestl dominates the instant coffee market and is estimated to have made a clear profit of 26 pence on every GB1 of instant coffee sold in the United Kingdom. Though roasted and ground 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 its beverages unit, which deals mostly in instant coffee.

Table 1 Transnational coffee companies and their affiliates Company 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, MJB Sara Lee Douwe Egberts, Merrid, la Maison du Caf, Marcillia, Soley Procter & Gamble (P&G) Folgers, Millstone, High Point Tchibo Eduscho

Source: Ponte 2001, p.17. Kraft and Douwe Egberts are amongst a number of roasters active in Vietnam, sourcing and training producers and processors in their quality requirements. This has given Viet Nam valuable experience in what TNCs desire from their coffee producers. However, a number of these 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 rise astronomically. However, the producers share in this US$43 billion market has shown a substantial decline over the last 20 years as International Coffee Agreements have faltered and producers control over prices has been transferred to transnational roasters and traders. 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 income retained by producers between 1989/90 and 1994/95 fell to 13%, with consuming countries retaining 78%.7 At the grassroots level, according to rough calculations, Vietnamese farmers receive just 35.64 cents/kg of coffee sold, compared to a selling price for instant coffee in the US 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 the population 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

7 Ponte, 2001, p.15.

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

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

Philip M orris

25%

Nestle24%

Sara Lee7%

P & G7%

Tchibo6%

Others31%

12

population) and the M'nong 17% (4.8% of the provincial population). Dak Lak's population growth rate is the country's highest at 6.18%/year. Dak Lak, with its large area and thinly dispersed population, possesses many favourable conditions for the development of agro-forestry, particularly specialised agricultural production areas. It is located in a tropical region with adequate moisture, temperature and light for the growth of many kinds of crops. In the dry season, Dak Lak's weather is not very cold, 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 having advantageous qualities such as a fine texture, a high water absorption level, and high fertility, Dak Lak is well-suited for the development of various industrial crops including coffee, rubber, pepper, and cashew, as well as short-term crops such as hybrid maize and cotton.8 After Viet Nam's reunification in 1975, the state implemented important policies to build Dak Lak into a New Economic Zone (NEZ) by (a) creating hundreds of agro-forestry state farms and 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 and co-operatives. Along with the implementation of reforms since 1986, Dak Lak has achieved much, including rapid economic growth: its per capita GDP jumped from US$204 in 1990 to US$390 in 2000. The structure of agriculture and animal husbandry has been transformed in the province, with an increase in the planting of industrial crops such as coffee and pepper for export. 2.3.2 An increase in coffee production The abrupt increase in the world coffee price in 1994 along with a reduced global coffee supply resulted in an increase in Viet Nam's coffee export price, bringing increased benefits from 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, by about 14.1%/year. In Dak Lak in 2000, the income sources of large households were quite varied, including coffee, pepper, cashew and sugarcane.9 By the year 2000, the coffee plantation 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% of agricultural land in Dak Lak and 86.24% of the perennial industrial crops area in the

8 Phan Quoc Sung, 1995, pp.10-14. 9 Nguyn Vn ng, May 2000.

Figure 10 Coffee-growing area by region

Dak Lak53%

Southeast Region33%

North + South

Central Coast

1%Central

Highlands (excluding Dak Lak)

13%

Northeast + Northwest

0%

Dak Lak50%

Southeast Region

34%

North + South

Central Coast

3%

Central Highlands (excluding Dak Lak)

12%

Northeast + Northwest

1%

13

province, and Dak Lak has become one of the biggest coffee-specialised regions in the country, 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 has been extensive rather than intensive (see Table 2). In the 1990-2000 period, coffee output growth was 30.4%/year, of which two-thirds was due only to expansion of the area being planted to coffee. The average coffee yield in Dak Lak is about 2.45 tons/ha. However, as this study concentrated on poor households with limited ability to access and apply coffee production technology, the average coffee yield revealed in the quantitative survey is lower than the average yield for the province as a whole. Most of the surveyed households use seedlings to plant coffee, which is a low-yield method, while shade trees are planted but are generally too short to shade all the coffee trees. There is no significant difference in coffee yield among household 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 a record low in the last two years. In Dak Lak, the price of dry coffee bean type RI10 fell from VND 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 to January 1999s level of VND 20,500-21,000/kg, the coffee price fell by 80%.11 (Fresh coffee prices 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 willing to store as much coffee as they had previously, further reducing demand. 2.3.3 Production costs Production costs are dominated by fertiliser. The amount of fertiliser used by coffee farmers increases according to the age of the plant and also depends on farmers' incomes and the coffee price. Production costs also include pesticides and irrigation, and depend on the quality of land, amount of water available, and cultivation practices, among other 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 current plantations, 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. On average, coffee bean production costs are VND 8,820.9/kg in Cu Mgar, VND 8,649.4/kg in Buon Don and VND 6,982.9/kg in Lak (see Table 3), while the selling price, already low for several 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 by the 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 of the product in that regionin other words, the greater the district's comparative advantage 10 Coffee export enterprises sort beans by size, weight, and colour into three grades: R1, R2 and R3. 11 ICARD figures. 12 Figures calculated from survey.

Table 2 Increasing yield, area and output of Dak Lak coffee,

1990-2000 % increase Yield 7.0 Harvested area 23.4 Output 30.4 Source: ICARD.

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

District Production costs(VND/kg of coffee

beans) Productivity

(ton/ha) DRC index

Cu Mgar 8,820.9 1.9 0.300 Buon Don 8,649.4 1.6 0.325 Lak 6,982.6 1.1 0.628 Source: In-depth quantitative survey, Dak Lak, March 2002

14

for the product. The DRC for coffee is 0.3 in Cu Mgar and 0.325 in Buon Don, but double this in Lak0.628. Lak's higher DRC index reflects the fact that its relatively lower coffee production 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 the coffee-producing households in Lak process coffee themselves. Those households in Cu Mgar 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 sun and 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

Collecting 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

15

and generally low-quality product, because the longer the coffee is dried under sun, the worse its taste. Another factor reducing quality is that the longer the rainy season lasts, the higher the "black nut ratio" or prevalence of fermented nuts. Export enterprises usually need to 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 "kong nong (small locally-made tractors) or lorries to transport it. On average, the cost of transportation by kong nong is 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 roads are their biggest problem, and 12.5% gave bad roads as their reason for using smaller and simpler transportation means. Bad roads are the main reason that transportation for coffee purchasing is more expensive (at VND 1,750/ton/km) than for selling coffee to export companies (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 and colour 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 three grades, preferring to purchase coffee in one mixed category and then reprocess it after importation.) A small proportion of these coffee beans (about 3-6%) is then processed into coffee 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, but generally only for reprocessing and resorting.

Table 4 Coffee transportation costs, 2001 Transportation

means Step in the commodity

chain Average 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 52,500

Source: Commodity chain survey, Dak Lak, March 2002.

Coffee growers' products

include fresh coffee, dried

100%

0.1%

(VND 5,784/kg)(VND 30,000/kg)

94%

7%

93%(VND 2,587/ kg)

Private assemblers'

products include coffee beans

World market: categorise coffee beans into R1, R2

and R3

Export at GIF price

Export FOB at Saigon port

Domestic market uses coffee powder

(VND 2,587/kg)

(VND 4,192/kg)

6%

(VND 5,784/kg)

99.9%

Source: Commodity chain survey, Dak Lak, March 2002.

Direct processing/ exporting

enterprises categorise coffee

beans

16

Transportation costs from Dak Lak to Sai Gon Port (a distance of 350 km) are on average VND 1,500/ton/km, including accommodation fees for drivers and other informal costs (see Table 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 private businesses to improve the quality of beans for export. Exporters do not pass on market information 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-quality coffee with a higher value, thus helping stabilise export channels, but requires a higher investment (about VND 670,000/ton) as well as waste treatment measures to prevent pollution.14 Moreover, coffee beans for wet processing must be of a similar size, colour, and weight. Export companies using wet processing methods buy fresh coffee directly from coffee producers who must ensure that their production activities meet exporters' technical requirements (for example, the ratio of mature berries must be 90%, activities such as watering, fertilising and harvesting must follow company requirements, and so on). Wet processing capacity facilitates co-operation among farmers in co-operatives and autonomous communities because it requires activities such as crop maintenance or harvesting to follow similar techniques and timing. In general, the export price for wet processed coffee is US$100/ton higher than that for dry processed coffee, while the farm gate price for wet processing is also VND 400-600/kg higher than that for dry processing, but the 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 companies with wet processing chains have made investments. The main reason is that wet processing technology requires a large amount of capital.

Figure 14 The wet processing coffee chain in Dak Lak

13 MARD 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

Small private buyers

Commune agents

District agents

Export company (dry processing)

Buy fresh berries

Sell fresh coffee or dried beans, or

repay debt Primarily process,

categorise

Export company (wet processing)

Buy dried coffee beans

To HCM City

Wet processed coffee export price is

US$100/ton higher

Export markets

To HCM City

Grow and harvest according to

company requirements

Price difference in each transaction: 50-100 VND/kg

Farm gate price is 400-600 VND/kg

higher

Invest in processing technology

Source: Quantitative research, Dak Lak, March 2002.

Build coffee-growing zones, joint-venture

17

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 and villages, 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 district Household

group Cu Mgar district

(Ea Pok commune) Buon Don district

(Ea Nuol commune) Lak district

( Dak Phoi commune) Rich households

Concrete house Motorbike, tractors, water

pumps 1-3 ha of coffee; have

planted coffee for a number of years

Hire labourers Have funds; access to loans;

some have special income sources (from relatives overseas)

Know how to take care of coffee; have access to information

Children have high educational 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 applied

technological inputs on plantations

Children have high educational level/have not quit school

Cattle; some have fish ponds/VAC

Trading Enough food Have high educational level Crop diversification

Concrete house Tractors; television 1 ha land; have many

fields 3-5 labourers Have pension; have

accumulated wealth in high coffee price periods

Know how to invest Children graduated from

7th or 8th class 3-4 cattle; 1-2 pigs Trading Enough food Still keep coffee plants

Medium households

Small concrete house Motorbikes, water pumps 7-8 sao15 of coffee; 1 ha of

land; less land Newly set-up family No funds Less access to information Have funds to bring children

to school; some children quit school

Good house with cattle Tractors 1-2 ha land No/fewer labourers; many

children; 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 sao or 1 ha of land,

less flat land; less coffee Many children; fewer

than 3 labourers Debt; earn a salary Do agricultural

production activities Lack food for 3 months

Poor households

Unfertile soil, low coffee productivity; less than 4-5 coffee sao; less than 1 ha land

Many children Temporary house No water pump; some have

Recently separated from parents with no land; less land (5 sao-1 ha), low quality soil; hire land (VND 100-120,000/sao)

Many children; disability/illness; newly married; old, less labour

No house/temporary and small house

Only simple production tools

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

Many children; newly married

Low-roofed house No television

15 1 sao = 1000 m2

18

Household group

Cu Mgar district (Ea Pok commune)

Buon Don district (Ea Nuol commune)

Lak district ( Dak Phoi commune)

television; some have motorbike

Very hungry for several meals/month; some are very hungry right before harvesting

Not provided with short-term loans, must borrow unofficially; no funds for investment

High ratio of children quitting school

Lack food for 4 months Poor ability to apply

technologies; do not know how to invest even if have capital

Very hungry for 6 months Don't raise animals

Extremely poor households

Newly married, or recently separated from parents; single; many children; perennial illness

Low-roofed house Less coffee area, low quality

soil; no or less land Nobody instructs them in

working 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 from parents

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

some just bought coffee land when price reduced

Poor technology

application/don't want to apply

No funds No assets Some still bring children to

school (mainly primary schools)

Lazy

Fewer labourers; many small children; disabled

Cottage Less coffee area; less

land, less than 2-3 sao of unfertile land; plant less coffee; unirrigated land

No knowledge on technological 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 in Dak Lak may: (a) have scarce or poor-quality land, (b) have many small children, meaning less available labour, (c) have relatives who have been sick for a long time, (d) be newly established as households (and consequently have less savings), (e) be unable to earn a living (with limited ability to apply new technology), or (f) be female-headed. These households often have temporary or low-roofed cottages and low-value assets (no televisions, motorbikes, tractors or water pumps). They do not raise pigs or cattle, and may have many children who have been forced to leave school early (most of their children will only graduate from primary school). They often work for others to earn their living. All these factors mean they have less access to bank loans. The characteristics of poor and hungry ethnic minority people in Dak Lak are not very different from those of other poor people throughout the country as described in numerous reports.

A low-roofed house is typical of the poor in Cu Mgar district

19

3.2 Coffee-growing households Households which produce coffee on a small scale (about 1 ha per household) comprise the majority of coffee-growing households in Dak Lak. These households, including both Kinh and ethnic minority people, respond to market signals in making their production decisions. Until recently, high coffee prices encouraged them to expand their production area by reclaiming 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 so on) and in specialised coffee-growing regions, coffee is the main income source, so the households in this group allocate most of their resources to planting coffee. In less favourable areas, agricultural production is more diversified with a lower level of investment and less intensive coffee production. Households which produce coffee under contract with state farms and companies comprise 10-15% of all coffee-producing households in the province. These households enjoy a number 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; some households receive a monthly salary. However, they have to use their own labour, and may have 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 large scale, at least several hecta. Since the research team concentrated on the poor, this group was not analysed in depth. Except for households contracted to state farms, almost all coffee-producing households sell their produce to local private middlemen. These households get no support from the government and are not involved in contracts to sell their coffee to processing and exporting companies. 3.3 Ethnic minority women Unlike the Kinh, ethnic minority people in Dak Lak (i.e., the E De, MNong, and other ethnic minority groups) follow a matriarchal system. The typical work division between husband and wife is summarised in Table 6. Ethnic minority women do almost all the housework, including strenuous work such as chopping and carrying wood. Most other heavy work, and most coffee plantation work, is done by men, though women help their husbands when needed. Children's work follows an informal 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 as pesticide spraying. Decisions to buy production and household materials and sell coffee are based on agreements between husband and wife. If the wife does not agree, the husband will not act alone, showing that the wife is not only the money keeper. However, gender equality remains very hard to attain, even in matriarchal communities. Although women play an important decision-making role when dealing with family assets, most important decisions requiring technical knowledge, such as cutting back coffee trees, diversifying crops or borrowing money, are the responsibility of men. The main reason for this, according to ethnic minority women, is that husbands know more than wives do, because husbands have 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 the household heads), generating contradictions: inequality in land control between men and

20

women is enshrined in these books, but according to the matriarchal system, ethnic minority women 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 9 Taking care of children 9 Chopping/carrying firewood, carrying water 9

Coffee plantation work Digging holes Helps husband 9 Planting coffee seedlings 9 Weeding Helps husband 9 Fertilising Helps husband 9 Watering 9 Spraying pesticides 9 Making brooms, breaking off dried branches, cleaning coffee gardens

9 9

Harvesting coffee 9 9 Transporting, loading 9 Protecting products Some 9 Drying coffee 9 9

Other work Fishing 9 Harvesting vegetables and young bamboo 9 Working for others 9 9

Decision-making Purchasing materials 9 9 Selling coffee 9 9 Buying assets, machines 9 9 Cutting down coffee trees 9 Planting other crops 9 Borrowing from banks Don't know 9 Borrowing from others 9 9

Source: Discussions with women's groups in Ea Sut and Lang villages, Ea Pok commune, 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 were almost no ethnic minority women leaders in the survey areas, except for Womens Union officials (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 have been 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 a group of middlemen who purchase coffee from households. Price differences between various middlemen are about VND 50-100/kg; the middlemen gain their margins mainly from primary processing (removing extraneous matter, rubbing and polishing) and sorting. The key task of the middlemen, however, is transportation of coffee from producers to processing/exporting enterprises. Neither households nor middlemen use wet processing

21

methods because of the high costs involved. Many private middlemen (over one-third of surveyed firms) have received loans from banks, at an average of VND 600 million. Coffee export businesses have established networks with many district agents and some affiliated 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).

22

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 regions of the surveyed districts of Dak Lak.16 Local people purchased many assets during this period. On average, about 70% of surveyed households now own bicycles, 45% television sets, and 25% motorbikes and "tricycles" or tractors (see Table 7).

Table 7 Ownership of various assets by district (%) District Assets 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 18.9

Source: Broad-based quantitative survey, Dak Lak, March 2002. However, the decline in coffee prices since this period has to some extent reversed this trend. 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-growing households now lack adequate nourishing food, including rice, 66% have bank debts, and 45% 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 of households (see section 4.2).

Table 8 Difficulties of households by district (%) District Difficulty 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 9.5 Have 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 in coffee-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 migrants peaked in the early 1990s, dropping slightly when local authorities implemented some

16 A 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 previous year, 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 Figure 15).

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 population density increased from 17 people/km2 in 1975 to 61 people/km2 in 1995 and is presently around 94 people/km2. 4.1.3 Food insecurity Coffee-producing households remember that when coffee prices were high, one kg of coffee beans 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 to decline, 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 for people 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 reduced the 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 are particularly common in coffee monoculture areas. Some have benefited from the support of local 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 paddy land 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 wet paddy cultivation.

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

Household type Average land area

(ha)

Average debt (all households)

(VND million)

Average debt (borrowing

households only) (VND million)

% of households hiring their labour

Food-shortage households 1.06 1.10 1.69 73.9

Food-sufficient households 1.55 2.42 3.02 22.7 Source: Broad-based quantitative survey, Dak Lak, March 2002. 4.1.4 Reduced school attendance

0

40,000

80,000

120,000

160,000

200,000

1976-80 1981-85 1986-90 1991-95 1995-99 2000Y ear

Num

ber of people `

p lanned m igra tionfree m igra tion

24

The educational level of people in the surveyed areas is low. Each village has only a few residents who are high school graduates. However, local people still value education highly. As a poor father in Lang village, Ea Pok commune, Cu Mgar district, said, Even though I am poor, I still encourage my children to go to school because I know I am ignorant. The large reduction in household incomes due to low coffee prices in recent years has forced many children of medium-off and poor households to quit school, particularly secondary school students. Parents who are able, continue to send their children to school, but say that if prices and incomes continue to decline, they may be forced to pull their children out of school. In public schools, the children of poor households and ethnic minority children are exempt from tuition fees and school contribution fees. Despite this, school attendance has a high cost for large, poor families. Clothing and shoes are expensive. In "semi-public" schools such as the one in Ea Pok commune, Cu Mgar district, costs are even higher as families do have to pay fees of on average VND50,000/month/child. The need for children's labour to generate more income also increases the (opportunity) cost of school attendance.

Box 1 No money for shoes17 Ms A is an E De widow in Lang village, Ea Pok commune, Cu Mgar district. Her family is one of the poorest in the village. She has nine children. The highest education level they have reached is 4th class. She plants only coffee on 2 sao of garden land and 2 sao of fields far from a water source. Her home life is very difficult; the family eats rice with sweet potato and cassava. Recently, knowing her situation, some farmers hired six of her children, but the pay is low: just 1 bag of rice, equivalent to 45 kg, instead of money. She does not know what to do, and does not have money to invest in diversifying her income or even for the cutting down of her coffee trees. In addition, planting crops on her land is very hard. Ms A's youngest child, who is 14 years old, was until recently studying in the 5th class. But Ms A revealed that her family is so poor that she does not have money to buy shoes for him to go to school, and he was ashamed in front of his friends so he quit school. Her household is registered as a poor household, so her children are exempt from tuition fees, but the difficulty is that she does not even have enough money to buy other necessities such as shoes for her children. She really wants to be supported to enable her youngest child to go back to school. 4.1.5 Changing income sources Of the surveyed districts, Cu Mgar has the highest revenue from coffee, Buon Don is next, and Lak is last. Richer households in more favourable coffee-growing areas such as Cu Mgar get a higher percentage of their total incomes from coffee, while richer households in regions less favourable to coffee growing, such as Lak,