Report No. 29358-VN Public Disclosure Authorized The Socialist Republic of Vietnam Coffee Sector Report June 2004 Public Disclosure Authorized The World Bank Agriculture and Rural Development Department Public Disclosure Authorized Public Disclosure Authorized First printing or web posting: 2005 ©The International Bank for Reconstruction and Development Agriculture & Rural Development Department 1818 H Street, N.W. Washington, DC 20433 CONTENTS Acknowledgments .......................................................................................................................... vii Acronyms and Abbreviations ........................................................................................................ viii Executive Summary ........................................................................................................................ ix BRIEF CONTEXT............................................................................................................................ IX IMPACT OF THE COFFEE CRISIS ........................................................................................................ X INSTITUTIONS................................................................................................................................ X STATE-OWNED ENTERPRISES.......................................................................................................... XI CREDIT......................................................................................................................................... XI ENVIRONMENT ............................................................................................................................. XI SOCIAL........................................................................................................................................ XII COMPETITIVENESS, STANDARDS, AND PRODUCTION POTENTIAL...................................................... XII ADDING VALUE IN EXPORT AND DOMESTIC MARKETS.................................................................. XIII POLICY-REGULATORY ISSUES AND PRIVATE SECTOR DEVELOPMENT ..............................................XIV PRICING DISTORTIONS AND SUBSIDIES .......................................................................................... XV RISK DIVERSIFICATION................................................................................................................. XV RECOMMENDATIONS...................................................................................................................XVI INTRODUCTION TO REPORT.........................................................................................................XVII 1. VIETNAM BACKGROUND.................................................................................................... 1 COFFEE’S ECONOMIC ROLE IN RURAL AREAS AND AT THE NATIONAL LEVEL ................................... 2 HISTORIC PERSPECTIVE OF VIETNAM’S COFFEE DEVELOPMENT........................................................ 3 Development of the Private Sector in Coffee................................................................................. 3 Coffee Sector Statistics ............................................................................................................... 4 2. INSTITUTIONAL STRUCTURES AND FRAMEWORK....................................................... 7 HOW GOVERNMENT POLICY AFFECTS THE COFFEE INDUSTRY.......................................................... 8 Role of State-Owned Enterprises................................................................................................. 9 Plantation Companies .............................................................................................................. 11 Export Companies.................................................................................................................... 12 Regulation and Taxes: Government and the Private Sector ......................................................... 12 Property and Land Use Rights................................................................................................... 14 INSTITUTIONAL FRAMEWORK....................................................................................................... 15 EXTENSION SERVICES .................................................................................................................. 16 Coffee Extension Opportunities................................................................................................. 17 Research and its Relevance to Current Needs............................................................................. 17 TRANSACTION COSTS, PRICING, AND COMPETITION....................................................................... 18 Market Information and Transaction Costs................................................................................ 18 Domestic Pricing and Competition ............................................................................................ 20 Contract Enforcement and Default Risk ..................................................................................... 23 3. STRUCTURE OF THE COFFEE SECTOR .......................................................................... 25 THE EVOLUTION OF SUPPLY ......................................................................................................... 25 Planted Area............................................................................................................................ 25 Production Technology............................................................................................................. 26 iii FARM SIZE................................................................................................................................... 27 PRODUCTION COSTS, YIELDS, AND PROFITABILITY........................................................................ 28 ARABICA..................................................................................................................................... 30 Arabica Production Costs......................................................................................................... 32 Arabica Processing .................................................................................................................. 32 Arabica Marketing ................................................................................................................... 33 OVERALL PRODUCTION POTENTIAL.............................................................................................. 33 Medium to Longer-Term Robusta Outlook ................................................................................. 33 Medium to Longer-Term Arabica Outlook.................................................................................. 34 QUALITY AND PROCESSING ISSUES ............................................................................................... 34 Quality Issues on the Farm ....................................................................................................... 34 Ex-Farm Processing................................................................................................................. 35 Quality Improvement Incentives ................................................................................................ 35 GRADING AND QUALITY STANDARDS............................................................................................ 36 DOMESTIC MARKETS ................................................................................................................... 37 Soluble .................................................................................................................................... 38 Coffee Imports for the Domestic Market..................................................................................... 38 Branding and Product Differentiation........................................................................................ 38 Domestic and Retail Prices of Coffee......................................................................................... 38 VIETNAMESE EXPORT MARKETS AND COMPETITIVENESS ............................................................... 38 Export Competition and Substitution ......................................................................................... 39 Export Volumes and Value........................................................................................................ 40 Production and Competitiveness ............................................................................................... 45 Value-Added Markets ............................................................................................................... 46 CREDIT........................................................................................................................................ 47 4. Risks, Risk Management, and Diversification......................................................................... 51 PRODUCER RISKS......................................................................................................................... 51 Risks for State-Owned Enterprises............................................................................................. 52 Risks to Small Traders .............................................................................................................. 52 Risk Management....................................................................................................................