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Workers from the Klasik Beans Cooperative in Puntang, West Java, sort coffee beans. Photo credit: Bandung Coffee Exchange
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Vietnam invested heavily in production methods and soon became the world’s second largest coffee producer. Photo credit: Indra Wiryawan
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Kenya coffee farmers want more education on innovative farming practices. Photo credit: Rainforest Alliance
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President Joko Widodo plants coffee with farmers in West Lampung, Indonesia. Photo credit: Antara
After the dismantling of the coffee quota system in 1989, global production rates skyrocketed, and many producing countries opened their coffee sectors to liberalization and foreign direct investment (FDI). For some countries, like Vietnam, deregulation transformed their industry, while others experienced significant setbacks. Aware of the growing crisis for smallholder coffee farmers, many countries seek solutions to the issues caused by liberalization. Can coffee producers find a way to make liberalization work for them?
Deregulation and the Coffee Paradox
Benoit Daviron and Stefano Ponte used the phrase ‘coffee paradox’ in 2005 to describe the disparity between booming coffee-consuming countries and the crisis coffee-producing countries face. The International Coffee Agreement, signed in 1962, kept coffee prices high and stable by holding exporting countries to specific quotas. After the quotas were suspended, international coffee prices declined drastically as production rates soared.
According to the International Coffee Organization (ICO), global production has increased by almost 60%, going from an average of 95.4 million bags at the beginning of the 1990s to an estimated 151.6 million bags by 2017.
Sudden aggressive competition at a global scale caused producing countries to lose their influence on coffee prices in the international market. Prices declined almost 75% after 1989, from $177.25 per 60kg bag to $101.85 in 1995. Shifting price control from exporting countries to large corporations and changes in regulations and governance of the global value chain have detrimentally affected producers.
Price volatility reduces a coffee grower’s ability to invest in farming and production improvements, threatening sustainable coffee and global production.
Africa Post Deregulation
Many producing countries turned to FDI and liberalization in an attempt to revitalize and stabilize flatlining coffee sectors. Some were successful, others were not. In a 2017 report on Value Addition in the African Coffee Sector, ICO states that Africa’s production rates declined by as much as 50% after 1990. “The continent’s share in global output decreased from 17.6% in 1990 to 10.8% in 2016…Over the same period, Africa’s share in the total value of global exports fell by a greater proportion, from 21% in 1990 to only 9.4% in 2016.”
While issues such as civil war and political unrest were partly to blame for the decline of some African-producing nations, liberalization was the primary cause.
“An important pattern [in the decline of African coffee sectors] is the liberalization of the coffee sectors following the dismantling of the export quota systems under the International Coffee Agreement. Regulatory frameworks and national coffee institutions, such as coffee boards, which were buying coffee from farmers at institutional prices to market the coffee in Europe and other centers of consumption at the time, were dissolved. When coffee prices dropped as a result of oversupply in the immediate aftermath of the end of the economic clauses of the Agreement, many national coffee sectors stalled,” writes ICO.
The Côte d’Ivoire was a notable exception. Liberalization increased production rates, and its coffee sector expanded until the civil war broke out in 2002, halting coffee production.
Quantity vs Quality
A few countries have managed to take advantage of liberalization. Brazil has increased production rates since 1989 and maintained its position as the world’s largest coffee producer, currently controlling 39% of the market. From 1989 to 1994, Brazil greatly reduced tariffs and non-tariff barriers (NTB) and joined the Mercosur trade agreement. During this period, the country’s smallholder farms became more marginalized as the country focused on large-scale estates, low labor costs, and high production volumes, emphasizing quantity over quality.
Arguably, the greatest post-deregulation success story is Vietnam. In 1986, the country enacted a series of economic reforms called Doi Moi that centered around a socialist-oriented market economy that allowed private companies to move into producing goods like coffee. In 1990, Vietnam was responsible for 1% of the world’s coffee exports. Now, it’s ranked number two globally, commanding between 17-20% of the market.
Despite liberalization, Vietnam’s government continues to heavily invest in coffee-related infrastructure and research. By focusing efforts on the high-yielding robusta variety, Vietnam has become the number one robusta producer in the world. Not content with just high production rates, the Vietnamese have also invested in local value addition. The country currently has 160 coffee roasting facilities, 8 instant coffee processing plants capable of processing 1.5 million tons, and 11 coffee blending facilities.
Two countries that experienced massive decline after liberalization but sought a different solution were Kenya and Colombia. Neither country was able to recover pre-1989 production rates after deregulation and liberalization. In 1986, coffee accounted for 40% of Kenya’s foreign exchange earnings. But by 2010, it was down to just 3%.
A study published in the European Journal of Business Management in 2013, entitled “Effects of Liberalization on Coffee Production in Kenya,” surveyed coffee farmers and production managers from the New Weithaga Farmer’s Co-Operative Union. The main reasons cited for the production decline were
- the mismanagement of cooperative societies
- declining farmers’ earnings
- decline in application inputs
- poor farming practices
- farmers’ loss of confidence in the management of coffee affairs
Despite liberalization issues, the Kenyan government, through the Coffee Directorate, has ensured that the price value of Kenyan coffee remains high even if yields are low. The exceptional quality of Kenyan coffee is recognized around the world.
Kenya is currently enacting a series of economic reforms, Coffee Cherry funding, and coffee debt forgiveness programs to help smallholder farmers get back on their feet. For more information, see Kenyan Industry Reforms.
Colombia has taken a similar approach. Market liberalization and other reforms enacted after 1990 greatly reduced the value of the Colombian coffee sector. Rather than abandoning such an important industry, the Colombian government established two programs to offset the adverse effects of declining international coffee prices.
The Specialty Coffee Extension program through the National Federation of Coffee Growers of Colombia (FNC) provides technical support. It helps farmers grow specialty coffee varieties that display differentiated characteristics of origin, preparation, or sustainable production. Obtaining origin designations and seals of organic or regenerative practices allows Colombian farmers to command higher prices for their unique coffees.
The second program ran until December 2019 and was called the Governmental Incentive for Coffee Equity (IGEC), which protected Colombian coffee farmers by setting a domestic coffee reference price to help mitigate the negative impact of declining international coffee prices.
Since 1997, Kenya and Colombia have been price value leaders in the international market and are known globally for producing high-quality coffees.
India is one of the few countries where coffee producers fought for deregulation and benefited from it. Before liberalization, coffee marketing in India was entirely controlled by the Coffee Board. After harvest, growers were forced to send their coffee to curing factories licensed by the Coffee Board, where it was pooled together and sold in two separate auctions, one for the export market and the other for the domestic market.
Growers received partial payment upon delivery of their coffee and the rest after auction. However, receipt of final payments could take up to two years or not be paid at all. Private exporters then bought the green beans and sold them internationally at higher prices. The pooling system gave the farmers no incentive to improve the quality of their beans or farming methods, as there was no way to hold an individual farm accountable for the final product.
Liberalization reforms were introduced gradually over four years, from 1992 to 1996. Allowing farmers to market their own coffee and introducing new organizations and value-addition institutions added much-needed vigor to the Indian coffee sector.
Today, India is known for being a leader in sustainable production, as much of its coffee is shade-grown in biodiverse fields. Farmers earn additional income from growing pepper plants, cardamom, and clove and selling timber from shade trees. The biodiversity also adds unique flavor characteristics and aromatic notes to their coffee.
Ready to Progress: Indonesia and Ethiopia
Indonesia is the fourth largest coffee producer in the world, and Ethiopia is the fifth. After several years of stagnant or slow growth in the post-deregulation era, they are determined to significantly increase production rates. Most coffee produced in Indonesia and Ethiopia comes from smallholder farms. Both countries face the challenge of inviting foreign investors into the market while protecting their smallholders.
Indonesia’s volcanic-rich soil means coffee grows everywhere, with arabica in the highlands and robusta in the lowlands. Yet, production rates have only increased by 7.7% between 2018 and 2023, and many farmers rely on other crops to support their families.
While certain Indonesian varieties and processing methods, such as kopi luwak, command high prices, the average Indonesian coffee bean is worth much less on the international market. In 2006, the price of coffee in Lampung was valued at 1.2% to 7.5% of the retail price in consuming countries. Low income levels and urgent financial needs often cause farmers to engage in green-picking. Harvesting before all the coffee cherries are fully ripe lowers the quality of the final product.
In an email to STiR, a representative from the Bandung Coffee Exchange in Indonesia described the issues that smallholders face.
“Many coffee farms in Indonesia are located on mountains and hills, making them difficult and costly to maintain. Plus, without fertilizer subsidies, farmers cannot afford the necessary amount of fertilizer per tree, let alone for hundreds of trees on their small plots. The high maintenance costs further discourage farmers from investing in their coffee crops, resulting in lower productivity.”
“The practice of ‘fortress farming,’ introduced by Jeffery Nielson, describes the approach of many coffee farmers in Indonesia,” he wrote. “Farmers treat coffee as a supplementary income source rather than a primary one. They primarily grow staple food crops for daily sustenance and only use a portion of their land for coffee. This dual focus leads to inconsistent coffee productivity and limited investment in coffee cultivation, as it does not significantly enhance their overall income.”
The Indonesian government aims to increase coffee productivity per hectare. During a recent visit to a coffee farm in Kembahang Village, West Lampung, Indonesian President Joko Widodo called on the agriculture minister to focus on the coffee industry.
“Our joint task is to significantly raise productivity. If productivity increases, the welfare of coffee farmers will improve,” Widodo stated on his official social media account. He announced that the government has increased fertilizer allocation from 4.5 million tons to 9.5 million to support this endeavor.
The government also collaborated with state-owned enterprises to form the Nusantara Coffee Project Manager Office (PMO) Program. In a press release, Dwi Sutoro, chairperson of PMO, said, “To date, we have facilitated more than 6,500 hectares of land managed by 2,500 farmers. We hope that the harvest from the land will be used to meet the needs of the domestic and international markets.”
Sutoro added, “PMO Kopi Nusantara develops various assistance programs and encourages the creation of a sustainable business ecosystem with the target of increasing the income and welfare of coffee farmers in the country.”
In light of these recent developments, the representative from Bandung Coffe Exchange commented, “With all these achievements and potential, we can safely say that the Indonesian coffee industry is indeed progressing. However, we need a better blueprint or roadmap for this industry to improve and advance more. Also, it would be great to see more solid collaborations between the upstream and downstream sectors of the industry. It’s there, but we believe it can be better.”
Ethiopia briefly experimented with liberalization in the early 1990s. As Africa’s largest coffee producer, the country experienced a brief increase in production during that time.
However, relying on a volatile commodity like coffee to increase export earnings proved unsuccessful. Nearly 35 years later, the Ethiopian government is once again liberalizing its coffee sector.
In an email to STiR, Egziael Buzeyahu from the East African Holding Company discussed what went right and wrong in the past.
“In the 1990s, Ethiopia’s attempt to open up the coffee sector to foreign direct investment had mixed effects. Some smallholder farmers benefited from better equipment and training, leading to higher yields. However, large foreign companies dominated the market, benefiting from new investments, processing facilities, and market access.”
“This made it difficult for smallholder farmers to compete and secure fair prices, with limited bargaining power and unequal access to resources.” Buzeyahu continues. “The focus on exports also led to volatile local prices, impacting small farmers’ livelihoods. This experience highlighted the need to protect smallholder farmers while encouraging FDI investment.”
According to Dagato Kumbe, the deputy head of the Ethiopian Investment Commission (EIC), greater attention is being paid to balancing the needs of smallholders as well as local and foreign investors.
A US Foreign Agricultural Service (FAS) report states that Ethiopia is expected to produce around 8.35 million 60-kg bags of coffee for 2023/2024. “The livelihood of 25% of the country’s population is directly or indirectly dependent on the coffee value chain and will remain so in the years to come.” (FAS)
Proponents of Ethiopian liberalization believe that FDI can contribute to building better infrastructure, roads, processing facilities, and storage capacities, which will improve efficiency and reduce postharvest losses.
The Ethiopian government stipulates that foreign investors must provide logistics services facilitating wholesale operations and modern marketing infrastructures.
For coffee exports, a $10 million annual procurement history and a commitment to exporting $10 million annually for the next three years are required. Local players will struggle to meet such steep requirements.
With around 95% of Ethiopian coffee production in the hands of smallholders, it’s imperative that their needs are addressed for liberalization to succeed.
“Smallholder coffee farmers in Ethiopia primarily need support in securing fair market prices, improving infrastructure, enhancing farming techniques through training, and adapting to climate challenges,” said Buzeyahu.
Obtaining loans and access to credit is difficult for most smallholders. Fluctuating international coffee prices and delayed payments make investing in new equipment, irrigation systems, and seedlings nearly impossible. Aging coffee plants are also a serious issue for many Ethiopian farmers.
Buzeyahu concludes, “It will be important to learn from past experiences of liberalization both in Ethiopia and beyond, to have targeted policies in place in order to protect smallholder farmers and ensure that they benefit from FDI.”
Global to Regional Partnerships
As Indonesia, Ethiopia, and many other coffee-producing countries navigate the current coffee crisis, the role of global corporations can’t be ignored. Foreign investment and capital are necessary at all levels of the coffee supply chain, especially at the farm level. More connections and partnerships should be formed between all actors in the coffee value chain, including global corporations and local governments.
To benefit from the international market, producers need up-to-date and understandable market information, access to efficient strategies, and institutional partnerships. Building information and integrating corporate share value at the farm gate level strengthens the foundations of the value chain from the bottom up.