Asian Journal of Agriculture and Development, Vol. 7, No. 2 67

Global Sustainability Regulation and Coffee Supply Chains in Lampung Province, Indonesia

Bustanul Arifin University of Lampung, Indonesia E-mail: [email protected]

ABSTRACT

This paper examines the global sustainability regulation in agricultural trade by conducting an in- depth assessment of the economics of coffee-producing regions in Lampung Province, Indonesia.

A negative campaign blaming illegal coffee producers for the loss of tigers in the Bukit Barisan Selatan (BBS) National Park in the province further complicates the issue, as the current coffee supply chain could not guarantee the workability of price transparency and asymmetric structures of coffee markets, to name a few. In this region, community initiatives have been developed to foster forest conservation by adopting coffee multi-strata practices under the agroforestry system and community-based forestry management in the buffer zone outside the BBS National Park.

Based on research findings, buyer-driven regulation of environmental practices in the coffee industry, which characterize most global initiatives, have somehow restructured the supply chain in producing regions. Recent global sustainability standards require adequate organizational capacity of coffee- farmer groups and rural cooperatives involved in the supply chain. The paper recommends policy integration between bottom-up initiatives at farm level or institutional changes at supply-chain organizations, and top-down sustainability standards set by the private sector and non-government organizations.

INTRODUCTION or non-government organizations (NGOs). The emergence of sustainability standards and The rise of environmental governance in non-state regulations could not be separated the coffee sector in particular and the global from the growing significance of the global food sector in general has evolved since the value chain (GVC) system, which generally early 1990s and developed more rapidly in disaggregates the structure of production, trade, this century. Sustainability perspectives and and consumption of commodities by the level long-term consequences of coffee practices or network of activities controlled by firms. on natural ecosystems and social-economic In the coffee sector, global sustainability dimensions of the livelihood sector have standards have been developed for the most part been discussed more widely by academics, within voluntary initiatives, involving collective government and private sectors, and civil society formulation by some stakeholders, outside the 68 Bustanul Arifin

framework of government bureaucracy. These the economics of coffee-producing regions groups share common interests in specific in Lampung Province, Indonesia. Emphasis agenda, such as consumer awareness of public is given on the implications of buyer-driven health, fertilizer and pesticide contamination, regulation, focusing on four main aspects: (1) organic perspectives, and other interests to position of coffee smallholders in the GVC, (2) protect endangered species, biodiversity, and market structures and price transparency in the other functions of the natural environment. In supply chain, (3) environmental service markets the last decade or so, buyer-driven regulation as entry points, (4) roles of the domestic market of environmental practices, which characterize and increasing effective demand, and (5) quality most global initiatives, have somehow issues in postharvest and coffee processing. restructured the supply chain in coffee- Desk literature review and extensive field producing countries. The governance issues observations of coffee-producing regions emerge when the key notions of entry barriers were conducted for about a decade over three and chain coordination have influenced not different studies, development activities, and only the flow of goods and services in the global empowerment programs of local stakeholders in trade, but also the degree of complexity in the the Sumberjaya sub-district of West Lampung, expectation of income streams by the economic Indonesia. actors. This paper is organized into five sections. Certification and labeling systems are also After this introduction, the rise of global expanding rapidly in the global food sector, sustainability regulation in the coffee sector, including the coffee sector. Environmental where the role of the voluntary regulatory and social standards in the coffee economy system has evolved somehow into a process have serious and long-term implications on of restructuring the coffee supply chain to the the sustainability of natural ecosystems in the farm-level organizations, is discussed. This is tropics and the livelihood of coffee producers, followed by an overview of coffee production who are mostly smallholder farmers. In the in Indonesia, with special references to the business community, recent trends also support dynamics of coffee-producing regions in strongly the shift toward a more ethical business Sumberjaya watersheds in Lampung Province, image through corporate social responsibility Sumatra-Indonesia. The analysis of the (CSR) in the GVC in general. On the other implication of the growing tendencies of hand, the emergence of third-party NGOs global sustainability regulation in the coffee on sustainable coffee initiatives has created supply chain is then discussed. The last section certification networks that might be comparable summarizes the findings and suggests the to the multinational corporate structures and bridge between bottom-up initiatives at farm possibly bypass the existing state regulations. level or institutional changes at supply chain Also, such NGOs somehow have their own organizations and top-down sustainability belief system in administrative bureaucracy. standards set by the private sector and NGOs to In short, these large multinational NGOs are achieve better environmental governance in the central in establishing and maintaining the coffee sector. legitimacy and effectiveness of international coffee certifications (Reynolds et al. 2007). GLOBAL SUSTAINABILITY REGULATION This paper examines the links between global sustainability regulation in agricultural Global sustainability regulation is generally trade and coffee supply chains by reviewing seen as an emerging paradigm and alternative Asian Journal of Agriculture and Development, Vol. 7, No. 2 69 mechanism to reduce the distortion effects of operating in the coffee sector around the globe: direct state intervention in the commodity supply Utz Kapeh, Organic, Fair Trade, and Shade- chain. In one extreme, non-state regulatory grown (monitored by Smithsonian Migratory efforts are argued to democratize markets by Bird Center [SMBC] and the Rainforest increasing the role of civil society in regulating Alliance). These third-party certifications have production and trade-related activities. On similar missions and objectives to improve the other extreme, standard and certification socio-economic and environmental conditions institutions could serve simply as new of coffee production and trade. vehicles of corporate control over global food Utz Kapeh originated as an initiative of production, trade, and consumption (Reynolds Guatemalan coffee producers and the Dutch et al. 2007). In the literature, work have been coffee company Ahold, which later became done in synthesizing major global initiatives in an independent Guatemalan-Dutch NGO. the coffee sectors dealing with sustainability Utz Kapeh has developed a set of standards standards and environmental governance (Ponte for third-party coffee certification, formally 2004, Giovannucci and Ponte 2005; Muradian equivalent to the EurepGAP, a certification and Pelupessy 2005; Reynolds et al. 2007). system for the sourcing of fruits and vegetables Based on the context of governance, there led by European retailers (Giovannucci and are at least four general categories of regulatory Ponte 2005). systems: (1) first party, (2) second party, (3) Organic certifications generally set the third party, and (4) fourth party “voluntary” following standards: (1) coffee is grown regulatory systems. without the use of synthetic agro-chemicals First party generally refers to “Coffee- for three years prior to certification, (2) Sourcing Guidelines of Starbucks,” which set farmers and processors keep detailed records standards for good social and environmental of methods and materials used in coffee performance. Later, the guidelines evolved into production and management plans, and (3) Coffee and Farmer Equity (CAFE) Practices, a third-party certifier annually inspects all which are part of Starbucks’ preferred supplier methods and materials (Ponte 2004). Issues program. Nevertheless, the monitoring process emerge in organic certification as there is a of CAFE Practices is conducted by third parties, deficit in the international harmonization of and the costs to comply with this standard have organic standards, which could create non- to be paid by farmers. In return, farmers are fair market differentiations at the global level. supposed to obtain reasonable price premiums. Organic certification is viewed as one of the An example of second-party regulatory main challenges facing voluntary regulatory systems is the Sustainable Agriculture schemes in the coffee industry, as this could Information (SAI) Platform, which are alter traditional governance practices in rural composed of specific commodity guidelines for communities by imposing paper burdens and sustainable agriculture along the supply chain. externally designed procedures. Organic coffee The monitoring process would be conducted by has been used as a marketing tool to attract the third party. new consumers, despite the significant price By its name, third-party certification difference. involves private sectors or NGOs in setting the Fair Trade certification is initially based on guidelines and monitoring the sustainability the partnership between the Alternative Trade standards in the coffee industry. There are at least Organizations (ATOs)—such as Twin Trading, four major third-party certifications currently Oxfam Trading, and Equal Exchange—and 70 Bustanul Arifin

coffee producers. Fair Trade is probably the period of time (Ponte 2004; Muradian and oldest certification in global trade; it began by Pelupessy 2005). The sustainability standards purchasing products in developing countries here also encourage coffee growers to comply directly from producers and selling them with local laws and adopt good environmental through networks of Third World Shops. In the practices. For example growers must not burn 1980s, ATOs began labeling fair trade products fuelwood and other waste wood from pruning through Fair Trade Labelling Organization of coffee trees, and new coffee farms should (FLO), such as Max Havelaar and the Fairtrade not be established on cleared forestland. These Foundation. Though the total sales of certified standards are similar to those of Starbucks, SAI Fair Trade coffee was only 13.6 percent of the code, and Utz Kapeh. total production of registered producers, the local Finally, the fourth party certification refers impact of Fair Trade certification in producing to the initiatives by the multi-stakeholders countries is beneficial for producers in terms voluntary scheme, which has been explained in of income generation, organizational skills, the introduction as the Common Code for the capacity building, and resilience to external Coffee Community (4C). This initiative is led by shocks (Muradian and Pelupessy 2005). the German Development Cooperation Agency Shade-grown coffee certifications are (GTZ) and German Coffee Association (DKV), also known as “bird-friendly coffee,” as the in which the steering committee consists of shade trees grown in the coffee farms provide major stakeholders in the coffee industry. The an excellent ecosystem for migratory birds; 4C codes also emphasize social and ethical hence, such certifications contribute to better principles, such as paying minimum wages biodiversity. The SMBC has developed a to the laborers, avoiding child labor, allowing certification system for production, processing, trade union membership, and complying with and marketing of shade-grown organic coffee international environmental standards on that is labeled as “bird-friendly.” According pesticide and ground-water contamination. to Muradian and Pelupessy (2005), this bird- Monitoring and auditing are conducted by friendly label is the most rigorous environment third-party organizations, and the costs of certification scheme in the coffee sector, asit this certification are to be covered by coffee combines organic standards with shade cover growers. and species richness. In addition, shade-grown A simple mapping of each governance coffee certification is also developed by the system is drawn under the frameworks of Sustainable Agriculture Network, which has seven main dimensions of global sustainability its secretariat in the Rainforest Alliance, an regulation on the coffee economy. These are: environmental group based in the United (1) sustainability focus of environmental States. governance; (2) coordination type among The Rainforest Alliance then produces the farmers, traders, and roasters; (3) risk label of “Rainforest Alliance-Certified” coffee, management and planning capabilities; (4) which generally combines environmental and target group of coffee farmers (growers); (5) social criteria. Coffee has to be grown under market access and networking; (6) expected the shade, although the shade criteria are less price premium; and (7) compatibility with strict than in the Smithsonian certification environmental services. because Rainforest Alliance aims to enlarge Table 1 was completed using information the actual impact of the scheme in the shortest collected from the field, interviews with Asian Journal of Agriculture and Development, Vol. 7, No. 2 71 prominent figures of farmers’ associations, standards have achieved the above objectives traders, exporters, and experts on coffee is still inconclusive. However, some suggest stakeholders. For example, under the dimension that coffee farmers receive both direct and of sustainability focus of environmental indirect benefits from sustainability standards governance, Starbucks’ first-party governance (Giovanucci and Ponte 2005). system with coffee growers and traders, do Similarly, the specific impact of these not mention its focus specifically, although standards on biodiversity is still unclear, but there the CAFE framework encourages natural is speculation that these sustainability standards conservation. The second-party governance have become the necessary pre-conditions to system emphasizes the principles of sustainable preserve local biodiversity in coffee-producing agriculture, using more organic input as the major regions. The most significant benefits of these interests of SAI schemes are adopted mostly in sustainability standards are probably the coffee-producing countries in the developing potential to strengthen social capital and to world. Likewise for the third-party governance improve community-cooperative governance of Utz Kapeh, Organic, Fair Trade, and Shade- structures in the producing regions, as these grown certification systems, the sustainability standards generally require the establishment of focus of environmental governance is quite farmer organizations and a locally adopted code similar. Such governance covers a wide of conduct. However, many of these standards range of concerns, such as environmental do not guarantee that direct benefits, particularly conservation, biodiversity, organic input, and price premiums, would reach farm laborers or erosion resilience, to name a few. Finally, the 4C local communities in general (Giovannucci and governance system advocates the conservation Ponte 2005). of water, soil, biodiversity, and energy, although its implementation in the field is not as simple THE COFFEE PRODUCTION SYSTEM as it is written. The other remaining dimensions IN INDONESIA of global sustainability regulation in the coffee economy are summarized in Table 1. Indonesia is the world’s fourth largest coffee The progress of global sustainability producer, after Brazil, Vietnam, and Columbia. regulation in Indonesia, albeit in its infancy In 2006, Indonesian coffee production was stages, have shown encouraging performance, 406,200 tons, which was a significant decrease especially in the coffee-specialty regions in from 519,500 tons of production in 2005. The Sulawesi and Sumatra where global buyers have decline in the yield of coffee can be attributed to formed some networks with coffee growers and the phenomena of unpredicted wet seasons and traders. By the end of 2008, 15 coffee-growing long drought because of climate change, low companies obtained Utz Kapeh certification, yield and poor post-harvest practices, and some two companies attained Rainforest Alliance tenure problems. Coffee production in 2007 certification, and one company in Gayo acquired was estimated to increase slightly (411,000 both Fair Trade and Organic certifications. tons), but the level of production was far below It is vital to note that the certification system the potential had the best farming practices has developed very rapidly in the last decade, been applied properly. Coffee consumption in and the number of coffee-growing and trading Indonesia remains low at about 120,000 tons companies has also increased in recent years. per year, which results in coffee producers and Empirical evidence on whether or not these traders targeting the international market. 72 Bustanul Arifin 4C Fourth Party Water, soil, Water, biodiversity and energy. weak, Very it is a market transaction Economic viability, sustainable livelihood Not specific Good network; although not operational low, Very flexible unless Weak, intermediary agencies Not available, just introduced in 2006-2007 Organic Soil fertility, Soil fertility, and erosion resilience close Weak, to a market transaction Reduced inputs, no monocropping Not specific Niche, well- established markets Medium, flexible Intermediary, public agency as buyer also One in Gayo Fair Trade Not specific, but close to organic input Strong Personal and household needs Smallholders, cooperatives Niche, well- established markets High, fixed Intermediary, public agency as buyer also One in Gayo Third Party Rainforest Biodiversity, soil Biodiversity, agro- fertility, ecology weak, Very it is a market transaction Reduced pest management, social risks Large estates Buyers are limited but increasing flexible Low, Intermediary, buyers enter after success 2 companies have been certified Utz Kapeh Not specific, environmental conservation weak, Very it is a market transaction Reduced pest management, social risks In practice, large estates Buyers are limited but increasing flexible Low, Intermediary, buyers enter after success 15 companies have been certified SAI Second Party Sustainable agriculture, organic input weak, Very it is a market transaction Reduction of external inputs Not specific Niche, well- established markets low, Very flexible Strong, need intermediary Not available Starbucks First Party Not specific, but natural conservation Strong Risk of single farmer buyer, equity issues High quality only coffee Single buyer, high buying power Medium, flexible strong, Very captive buyer Pilot project in Sulawesi and Sumatra : Synthesized by the author from several sources, including Muradian and Pelupessy (2005) Giovannucci Ponte Important Dimension Table 1. Sustainability regulations of the various certification systems in Indonesian coffee sector Table Sustainability focus of environmental governance Coordination type, among farmers, traders, roasters Risk management and planning capabilities group (growers) Target Market access, networking Expected price premium Compatibility with environmental services Progress and performance in Indonesia so far Sources Asian Journal of Agriculture and Development, Vol. 7, No. 2 73

Despite the decline of present coffee coffee with strong aroma, such as Mandailing production compared to the 1980s and and Toraja coffee bean, because of increasing 1990s, the role of coffee export in the foreign demand from the global market. The improved reserve earnings of the Indonesian economy security situation in conflict-torn coffee regions is unquestionable. In 2006, Indonesian coffee like Aceh is expected to have positive impacts export was about 286,200 tons, which was on the Indonesian coffee economy, as the share very significantly different compared with the of Arabica specialty coffee in foreign reserve export quantity of 407,700 tons in 2005.1 Most earnings has grown recently. Global buyers of the Indonesian coffee exports are Robusta and large corporations (e.g., Starbucks) have (80%) and only a small portion is Arabica developed their sustainability regulations in (20%). Coffee prices in the world market South Sulawesi and North Sumatra, known have increased significantly in 2007 because of as CAFE practices, which might lead to a limited amounts being traded and other factors “preferred supplier scheme.” This specific code contributing to the price surge of food and is developed in conjunction with conservation agricultural products. At the time of this writing, practices for coffee production, with support the Robusta price was USD 202.7 per kilogram from large-scale international chains of NGOs. (kg), while the Arabica price was USD 304.3 In 2006, coffee production in the Province per kg (World Bank Commodity Review 2008). of Lampung contributed to about 35 percent of In 2007, the area of coffee production in national coffee production. The foreign reserve Indonesia was estimated at about 1.27 million earnings from coffee export has contributed to hectares (ha), located mostly in Sumatra, Java, more than 50 percent of total export earnings and Sulawesi. The provinces of Lampung, South of this province, marking the significance of Sumatra, and East Java, are Robusta coffee coffee in the provincial economy. Long periods producers, while the highlands of Aceh, North of drought in Lampung have caused incomplete Sumatra, South Sulawesi, and Bali are suitable fruiting of the crops, hence reducing coffee for Arabica coffee. The national average of production to 141,300 tons in 2006 from coffee yield is about 0.64 ton per ha, where 143,100 tons in 2005. Export performance of the yield of Robusta coffee is slightly higher Lampung coffee was 224,800 tons, generating than that of Arabica. Increasing coffee prices in USD 250.6 million of foreign reserves in 2006. the global market would provide a significant These numbers were significantly lower than incentive system to improve coffee yield and the coffee export performance in 2005, which quality. In turn, this will increase foreign reserves recorded 329,300 tons or USD 271.3 million in from coffee exports. Some coffee producers foreign reserves.2 and traders are currently developing specialty

1 The data on coffee area, production, export, and consumption are collected from several sources, such as the Directorate General of Estate Crops of the Ministry of Agriculture, Central Agency of Statistics (BPS), and the Association of Indonesian Coffee Exporters (AEKI). After decentralization in 2001, problems in data consistency have increased due to poor reporting procedures and performance from local governments to the central government. Coffee data published by the International Coffee Organization (ICO) could be used as a reference for checking consistency. ICO data are available using bag-unit equivalent to 60 kilograms. Conversion to a metric ton unit should be conducted by multiplying the published numbers by 0.06.

2 These data were collected from the Provincial Services of Estate Crops in Lampung, which were then verified using the data from the AEKI Regional Office. 74 Bustanul Arifin

It should be noted that the total amount of 1,851 ha, which produced 113 tons of Robusta coffee export from Lampung does not reflect the coffee. The sub-district of Sumberjaya is one of total coffee production in the province. The trade the major coffee producers in West Lampung, statistic is based on the total amount of coffee contributing about 24 percent to the total coffee exported from the Port of Panjang in Lampung. area in the district3 (Figure 1). This also includes coffee production from the Lampung’s coffee history is clearly much Provinces of South Sumatra, Bengkulu, and shorter compared to when coffee was first even Jambi. All coffee producers in Lampung introduced in Java in 1699 (McStocker 1987) are small farmers who control an upland by the well-known trading giants of the 17th production system of 2 ha or less. Therefore, century: the Dutch United East India Company the general problems facing small farmers, such VOC (Verenigde Oostindische Compagnie). as limited access to new technology, market Rapid coffee development in Java could be information, price structure, and best practices associated with the enactment of the Agrarian in farming systems, are also present among Law of 1870, which allowed individuals and coffee farmers in the province. Interestingly, companies to open up coffee plantations from the large-scale processing companies (e.g., smallholders to large-scale estates, specializing Nestle, Switzerland) and multinational coffee- in Arabica. However, the infestation of leaf trading companies (e.g., Ecom Agroindustrial, rust disease during the 1880s destroyed coffee Switzerland; Olam, Singapore; Andhira, plantations, affecting Arabica production Netherlands; and Noble, Hongkong) are significantly. The introduction of the disease- operating actively in Lampung. Moreover, resistant Robusta species in the 1900s has some local coffee-processing companies, such somehow spread the dominance of smallholder as Bola Dunia, Sinar Dunia, Sinar Baru, Siger, coffee production to Sumatra and other places. and Jempol, have been around since the 1970s. Other than being resistant to diseases, Robusta These domestic companies sometimes serve coffee is more farmer-friendly and easily as immediate buyers that could obviously manageable since it does not require intensive determine the price structure and marketing farming practices. system of Lampung coffee. As the flow of transmigration from Java The production centers of Lampung to Lampung grew significantly in the 1950s, coffee are mostly concentrated in the district Way Besay Watershed in Sumberjaya became of Tanggamus and West Lampung, which are an attractive destination in addition to Way adjacent to the Bukit Barisan Selatan (BBS) Sekampung watersheds in Central and South National Park. In 2006, the coffee area in Lampung. This government-sponsored Tanggamus was 49,300 ha (30% of total area in transmigration has changed immensely the Lampung), which produced 24,100 tons (17% of culture, farming practices, and Lampung total production in Lampung) of Robusta coffee. economy in general. As agricultural land in Java The sub-district of Pulau Panggung is the major became more limited, waves of spontaneous producer of coffee in Tanggamus, contributing migrants who came from Java considered to about 34 percent of the total coffee area in the Lampung as the “new land of opportunity”. In district. In West Lampung, the coffee area was the new land, the ethnic Javanese (from East and

3 These data were collected from Provincial Statistics of Lampung, as cited by Kompas, July 16, 2007. Asian Journal of Agriculture and Development, Vol. 7, No. 2 75

Central Java) and Sundanese (from West Java) data of three subsequent studies in the last brought the intensive rice cultivation system, seven years. First was a study on Partnership while also adapting coffee cultivation from for Local Economic Development (PLED), earlier Semendonese settlers. In a relatively supported by the United Nations Development short time, Javanese and Sundanese migrants Program (UNDP) (2001-2003); followed outnumbered the first Semendonese settlers and by a study on Rewarding Upland Poor for changed the patterns of agricultural practices in Environmental Services (RUPES), supported the watershed. More permanent and intensive by the International Fund for Agricultural agricultural practices became more common Development (IFAD) (2004-2005); then a study in the area, as well as simple techniques of soil on Broadening Access and Strengthening Input management, weed control, and agronomic System (BASIS), funded by the United States practices such as pruning and grafting. In Agency for International Development (2006- the 1970s and 1980s, as population pressure 2007). The PLED program was commissioned continued to increase and the demand for coffee by the National Planning and Development land increased significantly, the migrants started Agency (Bappenas), while the RUPES and to grow coffee in the forest margins, even in the BASIS programs were commissioned by the state-owned protection forests and possibly the World Agroforestry Center (ICRAF), Southeast BBS National Park. Asia. The cases of sustainability regulation, One of the major coffee-producing regions coffee supply chains, and environmental in Lampung Province is Sumberjaya in West issues in Lampung coffee are drawn from the Lampung, which was previously administered

Figure 1. Growth of Indonesian coffee production and export, 1977-2006

Note: Date processed by the author Source: International Coffee Organization 2007 76 Bustanul Arifin

Figure 2. Way Besay Watershed in Sumberjaya, Sumatra, Indonesia

Source: World Agroforestry Center (ICRAF) Southeast Asia 2006

by North Lampung (Figure 2). In 2000, and coffee-agroforest—also known as multi- Sumberjaya was divided into two sub-districts: strata or shaded coffee—is grown in about 24.5 Sumberjaya in the East, managing 15 villages; percent. and Way Tenong in the West, managing 14 In Sumberjaya, forest cover and villages. The new Sumberjaya is only 35,646 ha, agroforestry are very dynamic. The amount of a significant decrease from the old Sumberjaya forest in the area declined from about 60 percent of 54,194 ha. Almost 90,000 people lived in in 1970 to 32 percent in 1978 to 10 percent in the old, larger Sumberjaya; the new, smaller 1990 and 2000. Over the same period, the area sub-district has about 50,000 people. Land in covered by coffee-based agroforestry systems the upper watershed is mainly used for coffee increased from about 8 percent in 1970 to 20 plantations (44.6% of the total sub-district), percent in 1978, to about 63 percent in 1990, with paddy rice on the lower portions (5.13%). and 70 percent in 2000 (Arifin et al. 2008). The rest of the land is mostly protected forest, Coffee is grown in three production systems: the ultimate function of the Way Besay sub- monoculture coffee, shade coffee, and multi- watershed. A coffee monoculture is grown in strata agroforests. Shade coffee and multi- about 20.1 percent of the total watershed area, strata agroforests have been expanding since Asian Journal of Agriculture and Development, Vol. 7, No. 2 77

1984 and now occupy about 36 percent of luxurious approach at that time, so there was no the area (Verbist et al. 2005). As mentioned dialogue to resolve the conflict. previously, the rate of deforestation peaked in Conflicts over land and resource use 1998-1999 when farmers took advantage of the grew significantly as the information and fall of President Soeharto’s government. There communication process did not flow very well was a sudden increase in coffee price due to among stakeholders involved. The conflicts currency devaluation and the relative freedom escalated as land status and property rights were of the early days of Reformasi expanded poorly defined and enforced. In one extreme, coffee production in the protection forests and the Ministry of Home Affairs recognizes the national parks. Despite its higher conservation existence of a village within the protection status under the New Forestry Law 41/1999, forest, in which coffee farmers and dwellers pay the rate of deforestation has been higher in the the property taxes, levies, and other retributions. national parks than in the protection forests On the other extreme, the Ministry of Forestry (Ekadinata et al. 2004). Van Noordwijk et al. has never acknowledged any farming practices (2000) and Verbist et al. (2005) have shown in the protection forest, let alone in the national that well-managed multi-strata agroforestry parks. What has been observed so far is that systems can be consistent with good soil and the tendency towards more permanent coffee watershed management. Finally, Suyanto et al. farming and unsustainable monoculture in coffee (2005) found that farmers with secure property practices has caused serious land degradation rights are more likely to establish multi-strata in the area, and loss of forest cover in West agroforestry systems than monoculture coffee Lampung and in Northern Lampung districts in systems. general. A comparable figure is also suggested In the early 1990s, Sumberjaya was by Lumbanraja et al. (1999), claiming that in notoriously known for conflicts over land use. 1970, primary and secondary forests covered The “security approach” employed by authorities 57.4 percent and about 12 percent of the area, during the Soeharto administration led to mass respectively. However, in 1990, primary and evictions of thousands of families living in the secondary forests covered only 12.3 percent area and prohibition of coffee farming in the and 18 percent, respectively. The majority of protected forests. The government adopted the land use in the 1990s is smallholder coffee “rule of law,” in which people are banned from farming, locally known as kebun (60.4%). The making a living in the protected sub-watershed remaining area was allocated for paddy fields, area, despite the inhabitants arguing that they homegardens, and houses and buildings. had been practicing coffee farming for more Coffee production from Sumberjaya is than three decades. Meanwhile, the government marketed to the nearby town of Fajar Bulan by was planning to build a hydroelectric power collector traders (Figure 3). Fajar is considered station (HEPP) using water from the Way the collection center of coffee for many sub- Besay catchment, to increase energy supplies districts in West Lampung. The collector traders to southern Sumatra and surrounding areas. sometimes sell the coffee to the middlemen in However, as the authority was only accustomed Kotabumi, or directly to broker traders and/ to a linear and command system, this state- or exporters, located in the city of Bandar owned enterprise used military power to remove Lampung, the capital of Lampung Province, people from the protected forest. Participatory about 200 kilometers from Sumberjaya. These planning in the development process was a brokers or exporters are normally members of 78 Bustanul Arifin

the Association of Indonesian Coffee Exporters are significantly different from instant coffee (AICE or AEKI), which is also a member of produced by modern processing brands such as the International Coffee Organization (ICO). Nescafe, Indocafe, and Torabika, to name a few. Nevertheless, exporters do not always market In Lampung, coffee farmers generally have the coffee to international markets, especially been in close relationship with collector traders, if the quality does not meet the minimum who often provide cash during the production standard of export requirements. Instead, coffee process without the complicated procedures production from Sumberjaya and Tanggamus of money lending. In return, these farmers is sold to local coffee-processing companies have to sell their products to these collector to produce a typical fine-ground coffee with traders, leaving the smallholders with limited a strong flavor (kopi kampung) under locally choices of marketing channels. This creates an well-known brands, such as Bola Dunia, interlocking trading system at the village level. Sinar Dunia, Sinar Baru, Siger, and Jempol. Interestingly, these traders encourage farmers The final coffee products of these companies to harvest the coffee in asalan quality; hence,

Figure 3. Generalized supply-chain distribution systems of Lampung coffee

Source: Synthesized from previous studies by the author Asian Journal of Agriculture and Development, Vol. 7, No. 2 79 the value added is accumulated among the outlined previously. Major coffee exporters collector traders. Given their high dependency in Lampung include Aman Jaya Perdana, on collector traders because of money-lending, Indocafco, Andira Indonesia, Antara Saudara, coffee farmers have a very weak bargaining and Indera Brothers, which absorb nearly 70 position. As a result, the market structure of percent of total coffee production in Lampung. the coffee marketing system at village level Major roasting coffee companies include is relatively unfair due to the monopsonistic Indocafco and Nestle, which recently have behavior of collector traders that distorts price been more active in promoting sustainability transparency. Coffee farmers tend to listen standards of the GVC system. Theoretically, the to collector traders not only about economic fairer the competition among these buyers in decision making, but also regarding the level setting the price discovery of coffee from rural of trust, socio-psychological factors, and other areas, the better the market structure and price social capital of the coffee economy. These are transparency, and the higher the price premium subject to a more detailed investigation in the received by the farmers. However, when these micro-institutional setting and careful analysis farmers do not have the luxury of choosing of the roles of non-state regulation. collector traders, the marketing system tends to Similarly, at the global trade level, be inefficient because the buyers seem to have coffee exporters are fighting to obtain a a single power in setting the farm gate price in fairer price from their partners overseas. rural areas. Exporters that are affiliated directly with global roasting companies usually do not IMPLICATIONS OF BUYER-DRIVEN have such complicated procedures in business REGULATION negotiations. In the growing GVC initiatives, buyers tend to establish subsidiary trading and The Government of Indonesia is highly roasting companies at coffee-producing regions concerned about improving coffee quality, in developing countries. These companies especially from the smallholder producers generally take care of certification costs to in each coffee production center across capture the interests of smallholder farmers who the country. In this case, the government could not afford such extra costs. The history of welcomes any governance mechanisms coffee zone system (rayonisasi) in Indonesia— related to capacity building of smallholders, and other important commodities, such as institutional development at the farm level, tea, sugar, and fertilizer—reveals the tale of and strengthening competitiveness of domestic distortions in agribusiness-related commodities coffee industries. The new forms of global in Indonesia. Consequently, the small farmers initiatives in coffee trade could strengthen the are also inter-locking with such supply chain positions of coffee smallholders in the GVC and systems due to the influence of global buyers encourage restructuring mechanisms to improve even at the farm level in rural areas. market structures and price transparency. As The fear of a single-buyer system is probably the coffee farming activities have close links the most notable concern of the Lampung with ecologically sensitive land resources, coffee industry in the new global system of an innovative paradigm in the environmental sustainability regulations. Currently, buyers services markets could stimulate more open of smallholder coffee productions include and transparent dialogue among coffee farmers exporters, roasting companies, and local coffee practicing sustainable coffee as providers factories, as shown in the distribution system (sellers) and coffee roasters, consumers, and 80 Bustanul Arifin

the international community as beneficiaries members differ significantly among coffee- (buyers) of the services. farmer groups across Indonesia. These factors Some of the major elements of the determine the degree of farmer groups’ roles consequences of growing environmental in solving problems and taking on challenges governance and sustainability principles and of in coffee production and complying with the Indonesian context of coffee economy are global initiatives on sustainability regulations. discussed below. Coffee-farmer organizations have been revived since 2001, especially when these groups were Positions of Coffee Smallholders in the GVC collectively negotiating their rights with the local government to utilize protection forests Several important issues for smallholder for coffee production activities. A more detailed coffee production system in the context of the explanation about tenure rights is discussed in GVC include low productivity, low quality the subsequent sub-heading on environmental of coffee bean, and low bargaining positions services. These farmer groups have established before the traders, coffee roasters, and exporters. well-defined codes of conduct and organizational Specific problems facing coffee smallholders in mechanisms in taking care of their daily life Lampung also include land tenure security and problems, especially on coffee issues. This images of being encroachers of the protection well-established institutional environment is an forests and BBS National Park. Initiatives at the important element in empowering smallholder global level, such as sustainability principles farmers to increase coffee yields through the and environmental governance, will not become introduction of more advanced techniques in positive incentive systems unless there are best farming practices, crop maintenance, land concerted efforts to solve the abovementioned care, and soil conservation, among others. problems. The principles on social, Currently, there is a qualified forestry- environmental, and economic dimensions laid extension agent residing in Sumberjaya, whose out in the 4C Matrix Code; the requirements to responsibility is mainly community forestry- obtain Utz Kapeh certification; and tree-shade related issues, and the management of the criteria put forward by Bird-friendly and Forest agroforestry system involving coffee crops, Alliance could be burdensome for smallholder timber, and fruit trees in the watershed. By farmers to comply with although roaster experience and practicing coffee farming, this companies and coffee exporters might be able agent is also very familiar with some issues to afford the certification costs and membership in coffee production and distribution systems. fees to become part of these global initiatives. These issues include initial capital to improve However, opportunities for better market the coffee yield, harvest and post-harvest access, enhanced returns from production, handling, boosting the quality of coffee bean, and improved social conditions in the coffee as well as increasing the bargaining positions producing industries would never come without of coffee farmers to enter into a “new culture” serious efforts to establish them. of global initiatives. In this case, smallholder The argument to improve the bargaining coffee growers and small-scale roasters could positions of these smallholder farmers by set the strategy in a more competitive world of forming farmer associations is well known trading and GVC. and have been practiced in Indonesia. The Recent trends show that global initiatives level of group dynamics, maturity of group on sustainability and environmental governance leaders, and relationship between leaders and have led coffee buyers to enforce traceability Asian Journal of Agriculture and Development, Vol. 7, No. 2 81 principles, such as those demanded by buyers In other regions where farmer groups in international markets. These buyers could or cooperatives were created for the sake of take advantage of production centers that traceability requirements, the capacity building have strong and dynamic farmer groups and and institutional empowerment of these groups rural cooperatives, such as in Sumberjaya, are generally very difficult. The top-down Lampung. Any information regarding quality formation of rural cooperatives (KUD=Koperasi standard, the pricing system of different grades Unit Desa) and poor images of KUD during of coffee, knowledge and technology transfer the Soeharto administration become serious (e.g., new coffee varieties), and fertilizers are challenges in bridging global initiatives with generally addressed through group leaders. local interests. The existence of a national The leaders then disseminate the information coffee-farmer association (APEKI=Asosiasi effectively to other group members using their Petani Kopi Indonesia), which has a regional own communication mechanism. Community chapter in each province, is without exception. gatherings, periodic informal meetings, and The difficulty to implement farm lobby at the “word of mouth” are the information exchange level of policy decisions, such as improving methods among members of the group. Once farmers’ bargaining positions before the traders the members see the direct benefits of becoming and international buyers, has made it difficult a part of farmer groups, the sense of belonging, to acknowledge such an organization as a code of conduct, and the programs could be genuine representative of the farmers. Though strengthened. Hence, group sustainability is most farmers are aware of the need to improve ensured. coffee quality, and increase market access, price Certainly, smallholder producers are transparency, and fairness, efforts to empower pressured to improve coffee quality because farmers through several groups or associations certified products tend to dominate coffee have to be handled with extra care. The short- trade in the future. However, not all small term interests shown by local politicians—to farmers and local roasting companies could take advantage of established groups—might afford to fulfill sustainability requirements be counterproductive to the objectives to and significant compliance costs set by the establish effective traceability mechanisms certification standards at global level. Global- on coffee trade. Moreover, different interests scale buyers and large-scale coffee industries from private sectors and development agencies, might argue that these common tendencies both domestic and international, sometimes might be in favor of well-organized and more lead coffee farmers to object to development capitalized smallholder producers and roasters, programs, which often operate in a single instead of unorganized and marginalized small pathway to achieve its welfare objectives. coffee farmers. This argument should be valid only under secular capitalist economic system; Compatibility with the Environmental it is not easily acceptable in Indonesia where Services Approach basic problems of poverty and unemployment remain important political issues. Moreover, The global initiatives on sustainability the distribution issues of the GVC system and regulation and environmental governance can social dimension of multinational firms, which be compatible with the growing approach on promote the creed of CSR, could be seen only as environmental services, where small farmers a greenwashing mask that carries a significant living in the forest margins (as providers amount of empty shell. or sellers of the services) could perform 82 Bustanul Arifin

realistic, voluntary, but conditional economic interactions among these stakeholders have not transactions with fellow roasters, coffee yet developed properly, establishing rewards consumers, and the international community or payment transfers for the sellers is fraught (as beneficiaries or buyers of the services). with serious complications. This is especially As mentioned previously, coffee farmers true where poor people are highly dependent practicing the agroforestry system using on environmental resources. Under such various types of tree shades in Sumberjaya institutional arrangements, the transaction costs watershed in Lampung Province are the of implementing rewards and payment transfers sellers or providers of environmental services. are extremely high (Arifin 2006). In Indonesia, Domestic and international roaster companies where buyers have to pay various taxes to and coffee buyers could play important roles in the national and local governments, exporter encouraging a process of self-empowerment so associations; and/or putting funds aside for that poor coffee farmers can make the necessary community development activities aimed at decisions to build a sustainable future based social responsibility, the new environmental- on their resources, on improved technology, services markets might be viewed as another and centuries of accumulated wisdom. In unwelcome tax or fee, contributing to high-cost Sumberjaya, Lampung—and in two other in the coffee value chain. benchmark areas in the province of Jambi and The approach to treat the “conditional” West Sumatra—the World Agroforestry Center tenure security to utilize protection forest (ICRAF) has commissioned RUPES to develop land as rewards for environmental services working models of best practice for successful in Sumberjaya, Lampung is probably an environmental transfer agreements adapted to innovative step to adapt the abstract concept of the Indonesian context in particular, and to the environmental service markets into more action Asian context in general. in the field. By the time of this writing, out of Potentially, buyers of such environmental 36 farmer groups in the Sumberjaya watershed, services provided by coffee farmers practicing 23 farmer groups — having an average of coffee multi-strata under the agroforestry 140 household members per group — have system include coffee roasters, consumers, obtained permits to utilize state protection and the international community. However, as forests for a 5-year probationary period (Arifin the general concept of environmental service et al. 2008). This probably coincides with the markets is still relatively new in Indonesia and agenda of IndoCafco and Nestle, both operating in Asia, these potential buyers of environmental in Lampung, to encourage partnership between services are not aware of the concept. the private sector and local farmer groups in Moreover, these buyers might be uncertain Sumberjaya4, as required by sustainability whether the payments or rewards would really principles from Global Initiatives such as lead to improved environmental services. In Utz Kapeh, Shade/Bird-friendly, Rainforest addition, as the institutions governing the Alliance, Fair Trade, which are also included

4 Actually, many organizations such as ICRAF, University of Lampung, and Watala have been involved in capacity building and institutional strengthening of partnership among farmers groups in Sumberjaya and private sectors and government agencies. In this partnership scheme, IndoCafco is responsible for ensuring market absorption, price guarantee, and marketing the coffee output from farmers in Sumberjaya (Kompas, August 9, 2006) while Nestle is responsible for providing technical guidance for best farming practices of coffee (Kompas, August 15, 2007). Further field verification is certainly required to give more accurate information on how the partnership mechanisms work and for how long. Asian Journal of Agriculture and Development, Vol. 7, No. 2 83 in the 4C Code Matrix. Once these HKm intermediaries provide links between sellers (Hutan Kemasyarakatan) farmer groups have (smallholder farmers) and buyers (roasting fulfilled the criteria and performance indicator companies, research institute, civil society of the community-based management, the organizations, or international agencies) and tenure could be extended for another 25 years ensure that sustainability principles are applied. before being subjected to the next feasibility At the least, intermediaries could contribute assessment. This step might also be seen as an in increasing public awareness, serving as ad hoc strategy to cope with the lack of property a clearinghouse for information, training, rights and land tenure security, these being a capacity building, negotiating, monitoring general problem of smallholders in developing and evaluation, resolving conflicts, absorbing countries. transaction costs, among others. Intermediaries Moreover, this approach could help have also helped generate collective action in develop and empower smallholder farmers linking smallholder farmers with the broader living in the buffer zones of national parks, market, providing support for weaker members and to reduce direct pressures on the national of communities to better address poverty parks. The types of farming practices become alleviation or ensure that the plight of the poor central factors in determining the degree of is not worsened. dependency of a household on the resources In this context, economic valuation of of the adjacent national parks. Research in environmental services becomes central in Kerinci Seblat National Park, also in Sumatra, ensuring the workability of “market transaction” show that families with both riceland and between sellers and buyers. If not serving as a mixed gardens depend less on park resources direct buyer, research organizations could step in than do rice-only farmers, all other things being and conduct priority research on environmental equal and farms with only mixed gardens have service valuation in coffee production centers intermediate dependency on protected forest adjacent to state protection forests and national resources (Murniati et al. 2001). In short, the parks. The most difficult challenge is how to research results tend to corroborate the view promote environmental services that would that agroforest systems are a superior landuse effectively protect a park that has a long and system for buffer zones, as the systems might complex boundary — a reputation of being an be expected to enhance the ecological integrity “open access” resource — and its own complex of a park in several ways. Moreover, sufficient history. Managing the national parks is not income from coffee production and other only conserving the wildlife and biodiversity marketable fruits and tree crops, for example, hotspots, but also managing the people living could alter the need for their harvest inside adjacent to the parks. Efforts on conservation the park. Complex agroforestry systems may would be more meaningful if they also provide provide environmental services in the buffer significant economic and welfare benefits to zone itself such as soil and water conservation, local people. and the extension of biodiversity habitat to the agricultural landscape in ways that are Market Structure and Price Transparency conducive to conserving the flora and fauna of the park (Murniati et al. 2001). The pressure for more sustainability The approach of environmental services regulations and certification of origin in the could be compatible with the global initiatives coffee trade currently grows significantly in of environmental governance, as long as Lampung and other places in Indonesia. The 84 Bustanul Arifin

controversial study by the World Wildlife Fund (for kopi kampung). Such phenomenon has not (WWF), which claims that about 45 thousand yet occurred in Lampung, but sooner or later, ha of coffee area in Lampung is in the BBS it will happen and local roaster companies will National Park, suggests that certification and have no choice but to buy only low-quality traceability are among the growing concerns coffee and possibly with higher prices. In other within global coffee supply chains (WWF words, these local roasters are at risk of going 2007). In the future, the certification of origin out of business due to their inability to compete could become a requirement for market access head-to-head with giant global companies that and possibly develop into a non-trade barrier, have strong links with and even operate directly which is counterproductive to the general in rural areas. welfare objectives. Major coffee buyers in Another dimension of global initiatives Lampung, such as roaster companies Nestle on sustainability regulations in the coffee and IndoCafco, have obtained Utz Kapeh sector is the governance and ownership issue certification and some exporters have complied of such initiatives. For example, the 4C Code with global sustainability standards. In other Matrix and possibly other initiatives tend to places in Indonesia, Starbucks has been represent corporate interests—which are mostly implementing CAFE principles that require concerned with brand reputation—instead of price transparency along their supply chain, making a positive contribution to improve social e.g., the Arabica coffee system in Sulawesi. This welfare in producing regions. The voice of coffee traceability requirement has probably become producers from developing countries might not an incentive system for growers and suppliers be well represented in the initiatives, except to develop a fairer and healthier relationship in probably the commitment to improve coffee the coffee trading system. quality to fulfill the sustainability requirements However, the presence of Starbucks in set by the buyers in developed countries. The South Sulawesi coffee production centers governance system within the global initiatives seems to show the power of a real single buyer and the ownership structures of such collective (Neilson 2008), which might not be found industry codes for coffee are subject to further excessively in other places in Indonesia. When investigations regarding, for example, the farmers are highly dependent on single buyers decision-making process to handle strategic like Starbucks, coffee farmers and exporters but sensitive issues, such as price fluctuation, are at risk of producing only commercial- cases of retention, labor standards, and human specialty coffee based on the quality demanded rights, to name a few. More importantly, the by Starbucks. As this global company requires global initiatives of sustainability regulations continuous supply and quality consistency and environmental governance in the coffee throughout the years, the production process trade could be counterproductive for fair trade and postharvest activities would refer only to principles if they evolve into a new dimension the Starbucks standard. On one hand, this could of non-tariff barriers in buyer countries, which become an incentive system for small farmers are mostly developed nations. and domestic coffee chains to improve coffee Finally, the improvement of peace levels in quality, expecting certainty, favorable price, conflict regions like Aceh and Poso of Central and guarantee of market absorption. On the Sulawesi could also ensue from the development other hand, this could threaten the specific local of the coffee economy and market structures in quality of coffee, which also has a high number the coffee sectors. The surfacing of the domestic of potential local markets and loyal customers coffee industry is probably associated with Asian Journal of Agriculture and Development, Vol. 7, No. 2 85 emerging younger generations involved in the coffee economy. Further, the public-private coffee business, such as KSU (multi-purpose partnership consisting of the government, cooperatives) Arinagata in Takengon District private sectors, research institutes, and NGOs of Aceh, which produce the Arvis Coffee should develop the national code of conduct Sumatra brand. Coffee production from these and establish benchmarks for the adaptation of cooperatives has obtained certification from Utz such initiatives into the domestic context of the Kapeh, USDA organic, Just Control Union of Indonesian coffee. This new domestic standard Certification, and Fair Trade. There is a sense of of environmental sustainability to develop ownership among domestic traders and roasters domestic markets could encourage effective in developing the trademarks for specific origins demand of the society. across Indonesia, such as Gayo Mountain Major coffee buyers in Lampung have Coffee, Toarco Toraja, Kintamani Bali, and obtained Utz Kapeh certification, while potentially, Lampung Coffee and Java Coffee. some exporters have complied with global Arabica specialty coffee has recently obtained sustainability standards, including participating more attention for a specific market segment, in the empowerment of coffee-farmer which should benefit the specialty coffee organizations, together with government production centers in highland Aceh, Toraja, agencies, academic institutions, and civil and Kintamani. Moreover, the development of society organizations. Generally, coffee-farmer unique qualities and specialized niche markets organizations in Sumberjaya have been revived using combinations of variety, location, and since 2001, especially when the groups were processing technology would allow smaller collectively negotiating their rights with the traders and exporters to maintain wider market local government to utilize protection forests for links with the GVC system. coffee-production activities. Farmers’ groups in Sumberjaya have developed initiatives to POLICY IMPLICATIONS: RESPONSE foster conservation of the protection forest by AND THE WAY FORWARD adopting coffee multi-strata practices under the agroforestry system and implementing the This case study on the Indonesian coffee government program of community-based economy reflects that sustainability regulation forestry management (HKm). The coffee- of global environmental practices in the coffee production activities take place in the buffer industry, which characterize most global zone outside the BBS National Park, where initiatives, has somehow restructured the small farmers are granted temporary tenure supply chain in producing countries. The first rights to utilize the protection forest in exchange and foremost evidence in this process of change for practicing coffee multi-strata with tree crops is the growing tendency of exporters and and timber in an agroforestry system mosaic. domestic roasters to encourage coffee producers This mechanism could be seen as a significant to organize as a group. This way, the monitoring potential to develop micro-institutions at farm system and traceability principle could be level, which are compatible with sustainability ensured. Since the Government of Indonesia has standards and initiatives at the global level. not yet taken any position regarding the growing Other dimensions of environmental service concerns on global initiatives, facilitating the markets are a promising approach between adoption of such initiatives by individual coffee poor coffee farmers who have been practicing roasters and exporters across Indonesia might coffee agroforestry as provider, and whoever contribute to the restructuring process in the the potential buyers of watershed services in 86 Bustanul Arifin

the coffee-producing regions are. The role of desirable, also involves significant quality risk. intermediaries in ensuring that sustainability Meanwhile, large-scale milling would probably principles are followed is very important in be more manageable in terms of quality control providing links between sellers (smallholder and prevent further retention problems at the farmers) and buyers (roasters, research border. Furthermore, it is relatively simple for institutes, civil society organizations, or buyers to identify gross processing defects, such international agencies) of the services. as immature harvesting, delayed pulping, or The remaining issues then include whether mold by a visual inspection of parchment coffee. the value-added creations should be focused However, since the demand for freshness is also on small-scale producers and/or allowing very high among traders coming from outside local and small-scale processors to comply the region, which also means green coffee with post-harvest handling, better processing, trading, assurance of geographical origins of and probably modern equipment. It should Lampung coffee could be employed. be noted that farm-level processing, though Asian Journal of Agriculture and Development, Vol. 7, No. 2 87

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