Coffee economics

Vietnam’s coffee production: caffeinated aspirations

Vietnam has established itself as a force in the global coffee trade through quantity more than quality, growing into the world’s leading producer of the potent, workhorse Robusta beans that are widely processed into instant beverages and espressos. Only Brazil, with its ample crop of the smoother Arabica bean, exports more coffee overall. With coffee consumption and prices at historic levels, Vietnam is operating from a position of strength. The question is: How does Vietnam aim to press its advantage? How does a country that has banked heavily on coffee in its transition from a planned economy to freer markets envision its strategy over the long haul? Part of the near-term answer may be found on the prosperous Le Ngoc family farm in the Dac Nong province of the Central Highlands – and on decisions informed by data that Son Le Ngoc reads on his computer screen in Hanoi. Anticipating the price to continue to rise, the Le Ngoc family has become more than a grower. Happy to help neighbouring farms that have bills to pay, the Le Ngoc family has been buying and stockpiling beans. “When we think we have a fair play on the market, we can sell for more,” explains Son, a journalist who on a daily basis relays market information and news to his father and cousins down on the farm. Vietnam, which once aggressively focused on building its market share, is now playing hard to get despite a crop that produced smaller beans because of unfavourable weather. Reports of stockpiling and speculation abound. Domestic prices for Robusta recently soared above $2,000 per tonne, up by more than 50 per cent over the past year. Vietnam has also benefited from the rising price of Arabica as more processing companies turn to the less expensive Robusta as a substitute. At the Port of Saigon, loading stood at 20,000 tonnes in mid-February, a pace well below traders’ forecasts for a shipment of more than 80,000 tonnes for the full month, Reuters reported. One reason for slower sales is that Vietnam has already sold about half of its current harvest, says Herve Touraine, executive director of the Hong Kong-based trading company SW Commodities. “Farmers are in no hurry to sell,” he says. By contrast, Vietnam exported 100,000 tonnes of coffee worth $175 million in the first month of this year, according to the nation’s Ministry of Agriculture and Rural Development. The year-over-year dollar value was up 13.2 per cent – even though the volume of beans exported had decreased by 30.3 per cent. Intense competition for Vietnam’s coffee has also sparked turmoil within the domestic market. “Foreign firms securing coffee exports illegally,” proclaimed a front-page headline in the state-run Viet Nam News in February. The Vietnam Coffee and Cocoa Association (known as Vicofa) has called on authorities “to clamp down” on foreign businesses accused of setting up “illegal” buying networks amid fierce competition for beans. Another report quoted a trader complaining that some growers have reneged on verbal agreement to make deliveries. In alleging wrongdoing by traders, Vicofa chairman Luong Van Tu accused the buying networks of violating government policies that allow foreign-invested companies only to invest in coffee growing, processing, preserving and transfer of advanced technology. The country’s Ministry of Industry and Trade has endorsed the association’s position, saying that under its commitments to the World Trade Organisation foreign-invested companies licensed for coffee exports were not allowed to buy coffee directly from farmers. Meanwhile, a group of about 20 Vietnamese exporters said to control 80 per cent of coffee exports have called on government ministries to clarify the rights of both foreign and domestic businesses involved in the coffee industry. The interests of foreign investors, Vietnamese traders say, have also been bolstered by the recent 9.3 per cent devaluation of Vietnam’s currency, the Dong, against the US dollar. Touraine declined to comment on the dispute. “We believe the most important goal is to continue to promote and sell Vietnam coffee around the world in order to continue to gain market share,” Touraine says. “It doesn’t matter if it is a local company or a foreign one as long as Vietnam farmers can profit from their hard work.” He adds: “For the moment the local market seems to work well as it is. Farmers have never been so happy. They sell at a very high price and they are making very good profits.” Vicofa, Touraine points out, recently said the current coffee could bring $2 billion if prices remained at this level at $2,000 per tonne, “which is very good news for Vietnam”. Vietnam’s growers, surveying the global demand for their beans, do not seem to think their boom could soon become a bubble and pop. While some Chinese farmers are hustling to transition from tea to coffee, Vietnam’s industry is showing a certain swagger in expectation of still more success down the road.  The government has promoted stockpiling with loans to help farmers who would otherwise have to sell coffee to recoup their capital investments. The agricultural ministry forecast that in 2011 about 548,000 hectares would be devoted to coffee production, a 1.8 per cent increase from 2010. The forecast yield was estimated to be 1.1 million tonnes, up 4.6 per cent. But in January, Vicofa’s Tu was quoted as saying that the country’s coffee exports should be limited to 1 million tonnes in order to support prices.   Stockpiling, including the Le Ngoc family’s buy-and-hold strategy, represents a near-term response to market conditions. Over the long term, Vietnam’s farmers, with the government’s encouragement and support, are devoting more land to coffee production and replacing ageing bushes with young ones. Government agencies are involved in promoting technologies to improve the crop and efforts to promote Vietnam’s coffee in domestic and global markets. Dak Lak Province, just north of Dak Nong, is in the heart of Vietnam’s Highlands coffee belt. In an interview, Enuol Dham Y, Vice President of the Dak Lak People’s Committee, emphasises the importance of the government, farmers and prominent Vietnamese firms such as Vinacafe and Trung Nguyen, working in concert to advance Vietnam’s role in the global coffee trade. Over the next five to 10 years, Y says, Vietnam should focus on replenishing ageing coffee gardens with bushes that produce high yield and good quality, as well as improving methods of harvesting and processing. “Coffee companies must continue to think about deep processing and having a competitive brand and let Vietnam coffee spread globally,” he says. Enhancing the quality of Vietnam coffee should be a national objective, says An Van Nguyen, CEO and Chairman of Thai Hoa Group, a company that plans to open Southeast Asia’s largest coffee-processing complex in 2012. To improve Vietnam’s standing in the global coffee competition, he says, it is also important to make the Vietnamese themselves – who are now often content to sweeten a somewhat muddy, bitter brew – develop a more discriminating palate. “I really want to establish a coffee consuming and processing association,” Nguyen says. “We have to orient our consumers on how good a delicious cup of coffee can be, to help them classify and evaluate. We must do that to reach the breakthrough. We have to think about how to change the taste of Vietnam consumers.” Nguyen acknowledges that Vietnam’s coffee belt lacks the altitude that helps South America to grow its flavourful Arabicas. Even so, he says Vietnam can do much to upgrade its quality. Vietnam’s ability “to enter the restricted circle of the international roasters,” Touraine says, would also require heavy investments in marketing and the development of a distribution network. Vietnam began to stride up the value chain of the coffee industry in the 1990s, branching from a producer of raw material to a processor and commercial purveyor. In January, instant coffee maker Vinacafe Bien Hoa debuted on the Ho Chi Minh Stock Market, promoted as a proxy for Vietnam’s coffee industry. And, a vibrant domestic market is being pushed by retailers such as Trung Nguyen and a Starbucks-like chain of coffeehouses known as Highlands Coffee that caters to the country’s emerging consumer culture. Highlands, notably, was founded by a Viet Kieu (overseas Vietnamese) who grew up in heavily caffeinated Seattle. Before Vinacafe’s market debut, a research report by Viet Capital Securities offered this bullish assessment: “The world’s Robusta market will be skewed more toward Vietnam as other producing countries are holding back their Robusta for domestic use. Most of the growth in demand from new consumers in the emerging markets is for entry-level coffee such as instant Robusta rather than the expensive Arabica. This creates a huge potential for Vietnam as it currently exports more than 90 per cent of its total Robusta output.” Moreover, the report notes: “The instant coffee sector outlook is bright as consumers increasingly value instant coffee’s simplicity of preparation. Domestic demand is forecast to grow at 10.5 per cent [per year] from 2008 to 2013, driven by increasing per capita income and urbanised lifestyle among the young generation, who appreciate the convenience of instant coffee.” Coffee has played a significant role in energising Vietnam’s economy over the past two decades. Impoverished by decades of warfare and largely exiled from global markets, Vietnam recognised the pitfalls of its economic dogma in the mid 1980s. While Mikhail Gorbachev initiated “perestroika” in the Soviet Union, Vietnam’s Communist Party in 1986 initiated a policy known as “doi moi”, or renovation – an ever-so-gradual shift towards freer markets that led to Vietnam’s admission to the World Trade Organisation in 2007. While communist symbols like the hammer and sickle are still celebrated in Vietnam and the state owns many large industries, Vietnam’s economic approach has changed dramatically. The production of coffee, which under French colonial rule had been a significant crop prior to World War II, was resurrected as a national priority under doi moi. Today, coffee is Vietnam’s number two export crop, its value exceeded only by that of rice.  Vietnam’s economic progress enabled the country to achieve “middle income” status in 2010 as measured by the World Bank, with a per capita income of $1,200. This is, to be sure, lower middle income and the growing pains include double-digit inflation and the recent currency devaluation to address a trade deficit. Amid such troubles, a recent Gallup survey of more than 64,000 people in 53 countries found the Vietnamese to be the most optimistic about the economy in 2011. (The most pessimistic? The French.) In Ho Chi Minh City and Hanoi, Danang and Hue, the growing middle class is moving up from motorbikes to cars and increasingly indulging in pricey machiatos at Highlands. Son Le Ngoc’s parents had been civil servants in a northern province before the government opened a new economic zone in the Central Highlands in the early 1990s. His parents had no farming experience, yet have prospered. Part of the success, Son says, resulted from his family’s decision to stick with coffee during the Asian economic crisis of 1996, while other growers switched to rubber trees in frustration. The Le Ngoc family owns 10 hectares all planted in coffee, about twice the size of the average farm in Vietnam, he says. Its largest customers include Trung Nguyen and various exporters. Son seems a bit bemused by the controversy within Vietnam’s domestic coffee market. Years ago, he explains, Vietnam’s farmers had scant leverage and coffee traders dictated the price. With his browser tapping into the website, Son explains how the growers now have more clout than before. “Now the farmer is richer,” he explains, “and has more information about the market.” Economic fact
Vietnam was admitted to the World Trade Organisation in 2007, following a policy that dates back to 1986 initiated by the country’s Communist Party known as “doi moi”, or renovation – an ever-so-gradual shift towards freer markets.

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