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ASEAN Coffee Industry

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ASEAN Coffee Industry ASEAN Coffee Industry: Brewing Sustainability through Differentiated Coffees Learning Team Project for ABS (ASEAN 2015) 25 NOVEMBER 2013 CARLOS | LEONADO | MARTIREZ | PANDA | PILIKULI | PONNUSWAMI LEARNING TEAM B3 ! ! World Coffee Situationer Coffee is one of the most commonly traded commodities in the world, second to petroleum. The International Coffee Organization (ICO) reported that in the crop year 2011/12, total global coffee production reached 8.7 million metric tons. Exhibit 1 provides a summary of world coffee production from crop years commencing 2008 to 2011. Though originally indigenous to Africa, coffee today is grown in seventy countries, with Brazil, Vietnam, Colombia, Indonesia and Ethiopia as the top five coffee producers in the world (see Exhibit 2). The coffee sector employs around 25 million farmers and workers. Two varieties of coffee crops namely Coffea arabica (accounting for 60%- 70% of world production), and Coffea robusta (30%-40% of world production) are of major economic importance. Coffea liberica and Coffea excelsa are two other traded varieties of coffee, but only to a limited extent. Global consumption of coffee has experienced an average growth of 1.2% per annum since the 1980s. Japan, the third largest importer of coffee, has an average annual growth is 3.5% over the same period, which plateaued over the last decade. Consumption in Europe remained constant, even showing decline, over the last five years. Further, in the United States, the largest importer of coffee, growth has also remained constant despite increasing awareness about specialty coffee. It has been estimated that by the end of 2020 coffee will be in short supply to the tune of 30 million bags per year. Coffee is traded as a commodity by international trade houses, dealers and traders. Prices are determined by the following factors: • Physicals (prices for green or physical coffee, daily volatility affected by real-time supply and demand) • Indicators (based on broad groups of comparable coffees) • Futures (projected prices for standard qualities) • Differentials (system linking physical prices to futures prices) The International Coffee Organization (ICO) was established in the early 1960s as an intergovernmental organization of importing and exporting nations working to tackle challenges faced by the global coffee sector through international cooperation. Its Member Governments represent 97% of global coffee production and over 80% of global coffee consumption. The ICO tracks the prices of the four main types of coffee available in the international market: • Colombian mild arabicas • Other mild arabicas • Brazilian and other natural arabicas • Robustas 2! Exhibit 3 shows the supply chain of coffee from farm to end-consumers. Differentiated Coffees Differentiated coffees are unique contributions to the coffee industry. They bring with them new products, flavors, and stories. Differentiated coffees keep people interested by appealing to the increasing public interest in social and ecological values. They represent the main growth areas in the mature coffee industry. There are many ways differentiated coffees are classified. Various standards are set by which coffee farmers comply with to produce differentiated coffee. Two common subsets of differentiated coffees are described below: Sustainable coffee (organic, eco-friendly and fair-trade coffees) fill a market niche that is rewarded with premium price while providing other superior benefits that help producers improve their sustainability. The number of certifications of sustainable coffee has been increasing and it constitutes one of the fastest growing market segments. One reason for this is the increase in awareness among consumers regarding sustainability and about the environment in general which has increased the demand for sustainable coffee. The second reason is that companies feel the need to differentiate themselves in light of growing competition. Given the future prospects of this segment, and the long term benefits of sustainable coffee, there has been an increase in the adoption of these practices by the coffee farmers and associations. Specialty coffee is the term used to refer to premium coffee. The increasing income of the middle class and the need for differentiation among the companies has led to a growth in the specialty coffee segment and is now the most rapidly growing segment of the coffee industry. Increasing number of retailers and associations have been working on developing blends and specialty coffees with the intent of catering to the growing demand in major markets. ASEAN Coffee Federation Established in 2011, the ASEAN Coffee Federation (ACF) aims to raise the standards of the ASEAN coffee industry to as high as possible, and foster collaboration among ASEAN coffee sector stakeholders through events and other knowledge and experience exchange initiatives. The main outcomes the Federation wishes to achieve are (1) the improvement of life of coffee producers, and (2) the assurance of quality of ASEAN specialty coffees. 3! ACF is composed of eight producer and consumer ASEAN nations, including Brunei, Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, and Vietnam. An eight-point mission was adopted by the Federation, as follows: 1. Act as the platform for the collaboration between ASEAN coffee organizations. 2. Provide knowledge for the coffee producers to build coffee quality and internationally recognized standard. 3. Provide knowledge for the consumers to create good perspective towards quality coffee. 4. Increase the share in the world market. 5. Motivate coffee producers to use ASEAN-GAP standard growing method. 6. Lift ASEAN coffee manufacturing up to the GMP standard. 7. Act as a source for funding. 8. Act as the mean to publicize ASEAN to the world. Vietnamese Coffee Industry The French introduced coffee to Vietnam in 1857 after which it steadily became one of Asia’s coffee-growing nations. As coffee production grew during the 20th century, small-scale production started shifting towards large plantations. The governing body for coffee industry in Vietnam is known as Vietnam Coffee and Cocoa Association (VICOFA). It is responsible for bringing improvements in coffee quality, marketing and promotion of coffee products within the country, development of sustainable coffee practices, and diversification into other coffee products. Other players include Government of Vietnam (GOV), Ministry of Agricultural and Rural Development (MARD), farmers, coffee companies, processors & exporters. Good market returns have increased coffee plantations by 12% over the last five years (see Exhibit 4). Further, coffee prices remain high and relatively stable, which provides a strong incentive for farmers to increase production. Although Vietnam’s coffee consumption has increased significantly in the recent years, it still remains low compared to other coffee producing and importing countries around the world. As a result of increased coffee consumption, many coffee shops proliferated throughout the country. Vietnam exports coffee beans to 78 countries worldwide. The top fourteen markets accounted for about 71 percent of total Vietnamese coffee bean exports. Germany is the largest importer of Vietnamese green coffee beans, and followed by the United States. The varieties of coffee that are grown in Vietnam include Arabica, Robusta, Chari (Excelsa) and Catimor, and some indigenous varieties of Arabica such as the Arabica SE. 4! Present trends in the Vietnamese coffee industry Arabica coffee production. Although Arabica coffee production (see Exhibit 5) has been increasing in the recent years it still accounts for only 4% of the total coffee production in the country. Sustainable coffee production practices. With the public-private partnership model, the GOV, through the MARD, is taking steps to encourage sustainable coffee production methods. Drop in productivity. There has been a drop in productivity in the industry due to ageing/old coffee trees. Industry experts have forecasted that within the next ten years half of the coffee plants will age and would have to be replaced with new plants. Best practices in the Vietnam coffee industry Unique watering methods. Vietnamese growers have been able to develop unique watering methods to develop their coffee plantation during the dry season. The coffee growers have been able to figure out the appropriate period of watering while also adjusting the frequency and the amount of water used so that the Robusta coffee can maintain good development. Favorable government policies. The GOV has introduced certain favorable policies to improve coffee production in the country. Some important polices introduced by GOV include (a) multi-section economy orientation and shifting; (b) allowing households and small farm-owners to have their own coffee plantations; (c) handling land usage right to farmers; and (d) many new investment and loan policies along with national socio-economic programs such as accommodation and cultivation settlement. Furthermore, foreign investors have been encouraged to invest in production and trading facilities in the country. The GOV, along with the MARD, has come out with a Vision 2020 program that plans to increase the production of sustainable coffee and also plans to invest in industrial scale coffee processing. Philippine Coffee Industry Lying in the “coffee belt” (see Exhibit 6), the Philippines is one of the few countries in the world which can commercially produces four varieties of
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