Market Reports

Indonesian Coffee economy

With coffee playing an important part in this South East Asian nation‚Äôs economy,¬†especially among small hold farms, Professor¬†Bustanul Arifin outlines his research on the landscape of¬†Indonesian coffee production','none',' After the major coffee producing nations of Brazil, Vietnam and Colombia, Indonesia ranks fourth on the global scale of coffee production. Of the 500,000 tonnes of coffee produced every year, about 350,000 tonnes is exported to international markets in Europe, the United States and other Asian countries. Coffee production is such a vital part of the country’s export economy, that increasing coffee prices in the last three years have contributed significantly to the export earnings of the Indonesian economy. The area of coffee plantation in Indonesia covers around 1.3 million hectares, spread mostly from the islands of Sumatra, Java, Sulawesi, Bali, Flores and Papua. Robusta coffee is generally grown in the Provinces of Lampung, South Sumatra and Central and East Java. Arabica coffee is grown in the Provinces of Aceh, North Sumatra, South Sulawesi, Bali and East Nusa Tenggara in the Island of Flores. Smallholder farms manage the majority of plantation coffee in Indonesia, with an average area of around one hectare per household, normally in isolated regions and with poor access to social services. The yield of Indonesian coffee is quite low, far below the average productivity in Brazil and Vietnam where very intensive practices are applied. About 80 per cent of Indonesian coffee export is Robusta, which is usually used as the main blend of the coffee body. In the last five years, Arabica coffee has obtained a growing significance due to the high prices and high-growing demand for specialty coffee. Indonesia is now developing specialty and aromatic coffee, such as Gayo Coffee, Mandailing (or Mandhelling) Coffee; Toraja (or Kalosi) Coffee, Bali Kintamani Coffee, Flores Coffee and so forth. Coffee Origins
The Province of Aceh on the northern tip of Sumatra Island is home to high quality Arabica Gayo coffee, grown in the Gayo Highlands in Central Aceh and producing more than 25,000 tonnes annually. In this province, the coffee is wet-processed and frequently bought and processed by large mills located at source with direct links into the international market. Beans are exported from Belawan (Medan) at a significant premium above international market prices. An improved security situation in wartorn-conflict coffee regions such as Aceh is expected to have positive impacts on the Indonesian coffee economy, as Arabica specialty coffee has recently grown its share in foreign reserve earnings. Global buyers and large corporations such as Starbucks have developed pilot projects of sustainability regulations in South Sulawesi and North Sumatra, known as CAFÉ (Coffee and Farmer Equity) practices, which might lead to a “preferred supplier scheme.” This specific code is developed in conjunction with conservation practices for coffee production, with support from large scale international chains of non-government organisations (NGOs). The port of Panjang in the Province of Lampung is an export outlet of mostly Robusta coffee produced in the southern Sumatra regions, including Bengkulu and Jambi. All of the coffee production in Lampung comes from small farmers, who control the upland production system of two hectares or less. Green bean exports from Lampung are over 250,000 tonnes to mostly European countries and some to Japan. Coffee production in Lampung Province takes place mostly in the forest margins, which include protection forests and the national parks, which are currently creating sustainability problems for the future. Currently, buyers of smallholder coffee productions include exporters, roasting companies and local coffee factories. Major coffee exporters in Lampung include Aman Jaya Perdana, Indocafco, Andira Indonesia, Antara Saudara and Indera Brothers, which absorb nearly 70 per cent of total coffee production in Lampung. Major roasting coffee companies include Indocafco and Nestlé, which recently have been more active in promoting sustainability standards of the global value chain system. Fairer competition among these buyers in creating better market structure and price transparency, hence the higher the price premium received by the farmers. However, when these farmers do not have the luxury of choosing which traders, the marketing system tends to be inefficient, because these buyers seem to have a single power in setting the farm gate price in the rural area. In South Sulawesi, high quality Arabica coffee is exported from the port of Makassar, which is grown in Tana Toraja districts in the highlands, as high as 2000 metres in altitude. This premium coffee is sold into specialty markets with particularly strong demand coming from the Japanese and US markets. Smallholder coffee farmers in Toraja generally apply low inputs, which could fall into an “organic” category because of the low amount of chemical fertiliser and pesticides applied. Consequently, the productivity of Torajan coffee remains low, despite the growing demand from international markets. However, in the near future, similar to the case of Aceh and Lampung, the protection forests adjacent to coffee plantations in South Sulawesi might face serious threats of encroachment for the expansion of coffee plantations. Certification and Standardisation
The Indonesian coffee economy responds very well to global demand, especially from the European Union that requires UTZ Kapeh certification. Currently, at least 15 coffee companies have obtained UTZ Kapeh certificate, including six plantations of nearly 7000 hectares under the state-owned PT Perkebunan Nusantara (PTPN) 12, headquartered in east Java.  Most coffee companies with UTZ Kapeh certification are located in Aceh and northern Sumatra, in addition to three coffee plantation companies located in east Java. PT IndoCafco is an example of a coffee company in Lampung that has obtained UTZ Kapeh certificate for 1500 hectares of coffee located in Tanggamus and West Lampung.  Moreover, new, progressive cooperatives of KSU Arinagata in north Sumatra and the coffee plantation in Aceh, have also obtained organic certification from the National Organic Program from the United States Department of Agriculture (USDA). With such a positive perspective, the Indonesian coffee economy has now entered the phase of a restructuring process to adopt the corporate-drive traceability systems, as an important requirement of global market access in the future. As a relatively newcomer in such global initiatives on sustainability regulations, Starbucks coffee company has been penetrating important coffee production centres in south Sulawesi and north Sumatra. Starbucks has developed pilot projects on CAFÉ Practices in these two locations and encouraged traceability and price transparency in such an exclusive coffee supply chain. Smallholder coffee farmers and coffee exporters are now attempting to obtain third-party verification to ensure the requirements set by the CAFÉ Practices. Whether or not the mandatory requirements and exclusive coffee supply chain would lead to worsening asymmetry in coffee market structures is really the subject of further in-depth studies on coffee marketing within the global initiatives of sustainability regulations.
Parallel to the story of UTZ Kapeh certification, Rainforest Alliance certification for shade grown coffee was obtained from a foreign-based development program in Aceh and foreign-based company in northern Sumatra. Local government-owned PD Genap Mupakat Gayo Specialty Coffee has been under partnership with a Dutch government agency to encourage “bio-coffee” and reduce the amount of external and chemical inputs. More importantly, this company also organises farmers’ groups, where the members farm in the buffer zone of Leuser National Park. Endorsement of the local government has also led to the establishment of the Aceh Coffee Forum (Forum Kopi Aceh) to discuss ways to increase coffee production and productivity, improve quality through harvest and post-harvest handling and conserve the buffer zone of Leuser National Park. Rainforest Alliance certification is also given to UCC Lintong Mandailing Coffee Estate, a Japan-based UCC (Ueshima Coffee Company) with agricultural product trading PT Gunung Lintong and PT Tunggal Menara Jaya. This company grows local specific Arabica trees, Lintong trees, under a shade-grown system of coffee plantation. This local species produces the well-known pure Lintong Mandailing coffee, through a “semi-washed” processing that uses virtually no water in removing the pulp and a specific drying process. Although the Indonesia Government has not yet taken any formal position to make the 4C Code Matrix and other global initiatives mandatory, the state-affiliated Indonesian Coffee and Cocoa Research Institute (ICCRI) has nevertheless played important roles in developing and disseminating the principles of sustainability and environmental governance of global initiatives such as the 4C governance principle – a business-to-business relationship and voluntary in nature.
In conclusion, the government of Indonesia is very much concerned with improving the coffee quality, especially from the smallholder producers in each coffee production centre across the country. In this case, the government welcomes any governance mechanisms relating to capacity building of smallholders, institutional development at the farm level, and strengthening the competitiveness of domestic coffee industries.  The new forms of global initiatives in coffee trade could strengthen the positions of coffee smallholders in the global value chain and encourage restructuring mechanisms to improve market structures and price transparency. Bustanul Arifin is Professor of Agricultural Economics in the University of Lampung and Professorial Fellow in the International Centre for Applied Finance and Economics at Bogor Agricultural University (IPB). He conducts a wide range of research in the coffee economy and has published 36 books and over 80 titles of journal articles and book chapters. He is currently a member of the National Innovation Council, Food Security Council and Advisory Team for International Trade Negotiations.

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