Market Reports

Explaining Indonesia’s Drop

Anomali café in Jakarta’s Sudirman Central Business District is the kind of place that never sleeps. The wood-adorned, three-storey café serves as a permanent meeting spot and remote office for youthful startups and suit-wearing professionals alike. It’s also well known for single origin Arabica variants from Sumatra. Veronica Herlina, Executive Director of the Specialty Coffee Association of Indonesia (SCAI), is clearly comfortable here as she sits down with GCR Magazine to discuss the state of the country’s coffee production. “A couple years ago it happened just like this. We cannot predict the climate change,” explains Herlina, a soft-spoken, yet authoritative voice in Jakarta’s coffee industry. “The rain has impacted the quality of our coffee this year. Sumatra has been impacted the most in the international market.” For the second consecutive year, the weather has been credited for lowering Indonesia’s green bean coffee yields, negatively affecting the nation’s exports and the livelihoods of local farmers. According to the latest estimates from the United States Department of Agriculture (USDA), Indonesia’s production is forecast to drop 600,000 60-kilogram bags to 8.9 million in the 2014-15 coffee year. Green bean traders Volcafe claim coffee shipments from Sumatra, the world’s third-largest grower of Robusta, dropped 41 per cent in June, raising concerns about the sizes of local crops. May 2014 exports from the Panjang port in Lampung, South Sumatra ended at 12,000 tonnes. That is a 45 per cent decrease from the same time last year. Herlina links the drop in production to climate change and poor farm management. She says that even a week’s worth of rain during the critical stage of development can delay the process, significantly impacting the final product in a year’s time. The USDA reports that Indonesia’s rainy weather resulted in sub-optimal pollination for its latest crops. In the 2012-13 season, excessive dryness negatively impacted production. On the farm managment side, Herlina says many farms lack shade for their trees, aren’t managing berry borer, or planting at improper altitudes. All of these factors are affecting both quantity or quality. “The impacts can be felt the most by buyers and niche roasters. They are looking for quality,” Herlina says. “It impacts the income of everyone. The farmers already have limited income. Maybe one or two of them feel like it’s dangerous if they have to do this continuously. But even if one person goes out of business there is always someone who will take their place in Indonesia.”  Armia Zuhri can account for how production drops affect farmers. He is the Director of the Sumatra Permata Gayo Cooperative. His organisation is well known in Indonesia for promoting specialty coffee in direct trade relationships between regional farmer unions and wholesale buyers. He has been active in the Sumatra coffee ecosystem for nearly 20 years, and assisted the Dutch government’s initiative to improve the quality of Gayo coffee in Aceh. Work like Zuhri’s is important to a region highly dependent on coffee production, with around 90 per cent of the population working as smallholder farmers. Although production here has been down, he says that high prices have been supporting coffee farmers. For people like Zuhri, who see the effects of climate change on livelihoods firsthand, there is little climate skepticism present. He says the unpredictable climate in Indonesia year after year is a direct effect of global warming. Although Indonesia has struggled with coffee cherry borers, they have traditionally only attacked his plants below 1000 metres in altitude. But because of gradual climate change, they are now infesting cherries at unprecedented altitudes. “Most of these challenges are not controllable by the coffee farmers,” he says. “The farmers need support from the local government, but it’s lacking.” Zuhri says that his cooperative has partnered with NGOs like Mercy Corps and Lutheran World Relief to find a solution for coffee crops affected by adverse weather. He thinks one thing Indonesian farmers can do to combat production drops is to replant their crops with a new variety of coffee, one that is more resistant to climate change. The main challenge here in dealing with the ups and downs of climate change is in Indonesia’s prevalence of smallholder farms. According to the SCAI’s Herlina, Indonesian coffee farmers are not the same as Brazil’s, who have big plantations and facilities that can sustain themselves even in times of damaging weather. In Indonesia, most coffee growers are private operators with their own specialised variants. She says Indonesian farmers must cooperate in order to survive: “That’s the big opportunity in Indonesia. Be specialised and be unique, but work together.” Drinking up supplies But climate change isn’t the only culprit in the drop of Indonesian beans around the globe. The USDA reports that, although Indonesia’s overall production will drop by 6.3 per cent this year, exports are dropping by 10 per cent. The difference can be attributed to an increase domestic consumption. The Association of Indonesian Coffee Exporters and Industries (AEKI) says local demand will jump by 33 per cent within the next two years. It predicts that coffee consumption per capita in Indonesia will surge to 1.54 kilograms come 2016. For exporters, a new strategy may be in order. Leman Pahlevi Sulaiman is the Managing Director of Medan-based coffee export operation PT Menacom, one of the leading Arabica coffee suppliers in Indonesia., and also Chairman of the SCAI. “As everybody mentioned, exports are down,” Sulaiman explains. “But also we have to realise that local consumption has increased by 7 per cent in the past five years alone. At the present moment it is 1.3 kilograms per capita.” Sulaiman believes that at a time like this, Indonesian suppliers should try to more aggressively cultivate the local market. Indonesia has a population of more than 250 million people, and has seen an average annual economic growth rate of 6 per cent in recent years. According to a report from global market insights firm McKinsey and Company, some 90 million Indonesians will join the consumer class by 2030 – more than in any other emerging market, except China and India. For consumption-driven enterprises like upscale cafés and mid-priced coffee labels, this will mean an additional US$1 trillion in annual spending by the nation’s increasingly affluent consumers. These are striking figures for AEKI Chairman Irfan Anwar. In May, Anwar told reporters that local demand is likely to rise to 400,000 metric tonnes in 2016 from an estimated 300,000 tonnes this year and 260,000 tonnes in 2013. This upward trend in local demand is most likely a result of a younger generation embracing coffee culture. The result will mean fewer foreign dollars coming into the country. After a press conference in Jakarta at the third annual Indonesian Coffee Festival in August, the nation’s Deputy Minister of Trade Bayu Krisnamurthi commented on coffee exports, saying: “Our target is more or less the same as last year’s. We hope to catch up in the second semester.” This will be a difficult task. Krisnamurthi is targeting US$1.4 billion in coffee sales by the end of this year. The Embassy of Indonesia claims exports were recorded at only $333 million in the first semester. In mid-October, at the 29th Trade Expo Indonesia, Trade Ministry Director General for Export Development, Nus Nuzulia Ishak, said that despite a lower production year, she was optimistic that the value of Indonesia’s coffee exports would increase by around 10 per cent to US$1.3 billion from US$1.17 billion last year. She credits Brazil’s drought as the cause. Ishak told reporters: “We will benefit from the crop failure experienced by Brazilian coffee growers as their markets are switching to our coffee.” To reach Krisnamurthi’s goal, local demand will still have to pick up the slack. Pranoto Soenarto is the Executive Director of PT Excelso Multi Rasa, the umbrella company of Excelso, one of the biggest local café chains. Soenarto told The Jakarta Post that in recent years, sales at his outlets have risen annually by more than 10 per cent on average. Higher consumption will also bring benefits to companies like PT Mayora Indah, the producer of instant coffees such as Torabika and Kopiko 3-in-1. Sribugo Suratmo, Mayora’s Head of Corporate Communication and External Affairs, said the domestic sales that make up 65 per cent of his company’s output continue to show an upward trend, climbing by around 15 per cent each year. AEKI reports that Indonesia’s coffee plantations can only generate 760 kilograms per hectare each year, which is well below other major producing countries. Local growers are struggling to boost the annual harvest to 1.5 tonnes per hectare. Hopefully the shortfall in this year’s export revenue will be covered by increased domestic spending by Indonesia’s increasingly affluent youth. The archipelago has what’s called a demographic dividend, which means more than 50 per cent of the population is under the age of 30. For venues like Jakarta’s Anomali café – a hot spot for the new generation of Indonesian coffee drinkers – it means business should continue to boom. GCR

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