Vietnam’s Transition

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Social reforms in the 1990s unleashed Vietnam’s entrepreneurial zeal elevating the country from a minor supplier to the world’s second largest coffee producer. Growers there are the most productive on earth.

HANOI, Vietnam

Vietnam was a minor player in the coffee industry. In 1957 it produced a mere 6,000 metric tons of coffee. Then, in the 1990s, as the result of reforms initiated by the government, coffee production grew at the rate of 20-30% per year – year after year, after year. By 2012 coffee production stood at 1.5 million metric tons.

Vietnam has since replaced Columbia as the No. 2 coffee exporting nation, the first non-western country to reach that position. Vietnam provides 20% of the world’s robusta, making it No. 1 in that market. It is also No. 1 in cashew nuts and peppercorns; No. 2 in rice.

Should Vietnam be congratulated or criticized for this success? Some hold that overproduction of an export commodity is similar to “dumping” resulting in supply-demand distortions that hurt everyone.

Others argue that any blame is misguided and misplaced. The almost supernatural growth of Vietnam’s coffee industry was due to reforms that led to tremendous production and economic gains at the farm level, the reduction of rural poverty, job creation and national integration, following two decades of war and upheaval. It is generally believed the government did not anticipate the extent to which the Vietnamese farmers would embrace the coffee enterprise.

On the farm

Vietnamese coffee farmers mainly grow robusta. The largest farms are in the central highland provinces of Gai Lai, Bak Lak, Lam Dong, and Dong Nai where about 1.25 million acres (500,000 hectares) are under coffee. Lam Dong is the traditional center of arabica cultivation, with recently added acreage in the north, in Son La, Lai Chau, Ha Giang, and Nghe An. Arabica is now grown on 125,000 acres (50,000 ha). For every arabica tree there are 10 robusta trees. Most of Vietnam’s coffee trees were planted from seed more than 30 years ago. A third are over-age and in serious decline reducing overall quality when mixed with the fruit of younger trees.

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Ninety percent of Vietnamese coffee farmers are smallholders on 1-2 hectares or less; many of these 500,000 farmers only recently secured land use rights and the freedom to operate a family business. They may be small, but these farmers have the world’s highest ratio of productivity-to-cost thanks to a combination of low labor expense (mostly family members), low cost (subsidized) fertilizers, an abundance of water for irrigation, low processing costs (sun-drying), and a low cost of living. This means that Vietnamese robusta from aging trees even with careless harvesting, crude processing, and faulty grading, can still compete on price.

High volumes of low-quality coffee is a double-edged sword. In pushing for higher coffee production the government failed to promote best farming practices. Skills to improve the selection of coffee cherries during harvesting, upgrading sorting standards, improving processing, and other downstream aspects of the coffee supply chain, such as storage and transport were neglected. Growth was never about quality.

The result of Vietnam’s quantitative approach (also seen in the tea industry) led coffee farmers to became almost addicted to the use of agricultural chemicals. Use of chemicals doubled in the 1990s and reached 5 million mt by 2000, the result of government subsidies and a huge increase in local fertilizer production. There was little or no soil testing, placing future soil productivity and human health at risk. The coffee farmer is also likely to irrigate crops profligately; water is seen as a free, relatively unlimited resource. These unsustainable practices lead to environmental degradation.

Toward sustainability

The government and the coffee farmers of Vietnam have since read the handwriting on the wall (World Bank) and gazed into the crystal ball (FAO). Farmers are increasingly aware that sustainability measures are not only crucial to preserving environmental and human health, they add value to a farm product, as consumers in importing countries become aware that their buying decisions can affect the environment.

To reach thousands of isolated coffee farmers, NGOs work jointly with large coffee processors and exporters who buy from smallholders. The Rainrorest Alliance operates an export-driven certification program for coffee farmers who limit chemical use, manage waste disposal and conserve water, protecting soil, wildlife, and water quality. RA’s rural outreach in farmer education and technology transfer is well established in Buon Ma Thuot, Dak Lak province.

Common Code for the Coffee Community (“4C”), based in Bonn, Germany, uses a three-color rating code for farm practices: green for best practices, yellow for practices that need improving and red for those that should be eliminated.

Holland-based UTZ promotes a certified code of conduct, reaching farmers who account for about 7% of Vietnam’s coffee production.

Adding value

Vietnamese coffee farmers operate on slim margins, as low as 15% of retail. Sometimes, these dip below the cost of production, placing the farmer and his family in financial jeopardy, as access to credit is limited and often there are no alternative sources of income to fall back on.

For this reason, some in the coffee industry advocate converting raw green coffee to branded, consumer-ready products. Adding value includes post-processing of robusta to improve flavor and acidity; roasting, grinding and packaging coffee for consumer use; decaffeination; conversion of whole beans into soluble coffee products. The most effective convert coffee, a commodity, to coffee, a profitable shelf-ready retail product.

In the last 10 years, there has been increased emphasis on growing the home market, moving into the upper levels of the supply chain, expanding retail grocery offerings, and expanding coffee shops and cafés.

About 95% of Vietnam coffee is exported to the US, EU, Japan, and China. Many in Vietnam drink tea, but domestic coffee consumption has grown and per capita consumption now averages about 1 kg per year. An expanding, aspirational middle class is willing to spend more time and money in cafes and restaurants. Incomes are rising. In 1995, per capita income was only $250; the figure stood at $1,200 in 2000. This has stimulated investment in the retail sector, both from local venture capitalists and foreign investors. Dong Le Nguyen Vu, c.e.o. of Trung Nguyen Coffee, Vietnam’s largest domestic coffee company said it best: “The GOV [government] has issued a decree: encourage investment in agriculture, increase coffee processing to create better conditions for improving coffee values and elevating Vietnam’s coffee brand in the world.”

Boosting quality

Enhancing the quality of a product is more difficult than adding value, which often relies on marketing to generate sales. Several years ago, the Vietnamese government decided to direct more resources into growing arabica. Since there is a shortage of suitable virgin land in the traditional center of coffee production, the central highlands, arabica is being planted at high elevations in the north and northwest. In some cases mature robusta trees are being removed and the area replanted with arabica seedlings or improved varieties. The conversion is slow because asking farmers to replace income-producing trees – even old ones - with seedlings that will not yield for several years is done at great risk. The best arabica is washed. Robusta is normally sun-dried. Arabica is generally wet-processed requiring machinery that uses as much as 15-20m³ of water per ton of cherry. This is why expansion of arabica in the north has been slow with less than 50,000 acres (15,000-20,000 ha) under coffee.

Another strategy calls for improving the robusta. The Central Highlands Agriculture and Forestry Science and Technical Institute, part of the Ministry of Agriculture and Rural Development, conducts plant research aimed at improved yields, disease and drought resistance and better quality. In the last five years, the institute has developed 21 new coffee varieties (grafted seedlings), and is distributing these to farmers at the rate of about 4 million a year. This addresses both re-planting and replacing aging trees.

Another way to boost bean quality is steam processing which follows traditional processing. Developed in the 1930s, but seldom used in Vietnam, steam softens and rounds out the coffee by balancing acidity in the robusta bean.

A Small Producer . . .

Mr. Thuy was born in Vietnam, but moved with his family to Houston, Tex., when he was 8 years old. He returned to Vietnam in 1998, aged 28 with, he says, $700 in his pocket. He and his wife (Thuan) started Thuy & Thuan Coffee Company (T&T) in Lam Ha District, Lam Dong province, in 2010. The modern, fully equipped factory, featuring machinery imported from Brazil, stretches over an area the size of two football fields, and produces more than 12,000 mt of coffee a year. T&T runs their wet mill in affiliation with Mercafe, Vietnam, which exports green coffee to its sister company, Mercon, Florida, in the US. Mercon distributes to Starbucks and Illy Café, according to Mr. Thuy.

The downward trend of coffee prices has been hard on T&T, as bank credit is tight. According to recent industry statistics, of the 127 coffee exporters operating in Vietnam in 2012, 56 have either gone out of business or have had to reorganize. Their unpaid loans totaled $379 million.

A conversation with Mr. Thuy revealed a frustration expressed frequently by Vietnamese coffee farmers. Even in cases where quality of green coffee is raised substantially and sorting and grading done meticulously, much Vietnam coffee gets mixed with other origins and grades. The Vietnamese brand is still-born. “This is one of our big problems and frustrations,” he said.

. . . and two enterprising farmers

Mr. Chou, 26, works two, newly-established, 6 acres (2.5 ha) arabica farms 11 kilometers apart in a mountainous region of Son La province, in northwestern Vietnam. His coffee is collected at the farm gate and taken to a local factory for wet processing. His biggest concern is the occasional frost in winter, which damages the trees and fruit.

Mr. Va Hong Hanh, 43, is an enterprising coffee farmer who takes advantage of the latest information and training available from the government and NGOs operating in his area, Di Linh District, Lam Dong. Hanh’s three-hectare plot is located a good distance from his home. Secondary roads are unimproved, hard-packed dirt degenerating to a narrow, deeply-rutted track. On the way to his farm he points out several coffee varieties, including a tree unique to Vietnam, mit café or jackfruit coffee, recognized by its oversized leaves. Hanh emphasizes that he is renovating and upgrading his trees by grafting clonal scions to established root stock using TR 14 and TR 18 arabica, which have very high resistance to disease and produce dense or heavy cherries. The farm is Rainforest Alliance certified. He uses only organic fertilizer and estimates his current yield conservatively at 4,000 kg/ha. He also grows tea. Asked which is the “better crop,” he replies, “With coffee, I can buy gold; with tea, food.”

Trending

In Vietnam, those at the top of the coffee supply chain are learning to work more closely with NGOs and farmers on certification schemes: fair trade, organic practices, sustainability. To qualify for Fair Trade certification farmers must organize into collectives. Training and improving farm practices can be done efficiently, rapidly, and cost-effectively through a co-operative.

There is also a growing awareness on the farm, at the processing plant and at the warehouse, of just how critical it is to harvest and sort ripe cherries to prevent unripe or diseased fruit from moving up the supply chain; to get drying right, moisture levels optimal; to remove floaters, damaged, and discolored beans and extraneous material.

Farm gate and spot pricing puts the farmer and producer at the mercy of unpredictable fluctuations in the market. Transparent, fair price-setting that cushions farmers and others from drastic, unpredictable swings could be adopted.

Value-addition is being studied at all levels of the coffee industry in Vietnam. Valorizing, branding, and realigning toward a growing domestic market are good strategies for those at the lower levels of the value chain. The smallholder is at a disadvantage due to lack of credit and clout, but farmers could form collective organizations to build processing factories, warehouses, etc.

Diversification is a very hot topic in Vietnam – at farm level, at the factory, at retail. Farmers are actively looking at which food crops they might grow to protect themselves from the price fluctuations typical of the commodity-monoculture environment.

Intercropping with fruit trees, peppercorns, macadamia nuts, and tea has been suggested. Some coffee farmers are pulling up their old coffee trees and planting market vegetables, strawberries, baby cauliflower or mushrooms. This is especially true on the outskirts of Dalat City, Lam Dong, where, when leaving the city on Highway 20, one can see many hundreds of newly-built greenhouses dedicated to raising high value crops. One venture capitalist exclaimed, “Tea will bring in $10,000-15,000 per hectare, coffee, $25,000 per hectare; specialty vegetables, $200,000; strawberries, $300,000; orchids, $500,000-$700,000. Where would you put your money? ”

The Quality Conundrum

Looking at Vietnam’s coffee industry one discovers an inconvenient truth: “You can’t make a silk purse out of a sow’s ear.” Although Vietnam robusta is on the lower end of the quality continuum, according to the siperati, it has found its niche, its commercial utility, even its fans. It’s the go-to bean for soluble coffee. Should the robusta establishment aspire to higher levels of quality, hoping to be awarded with a substantial return on investment? Or, should producers set more realistic expectations, aspiring instead toward sustainability on the farm, good processing in the factory and careful sorting and grading at the warehouse? There is vigorous market sector that finds mediocre robusta beans perfect for the business model? Is cheap, bitter coffee a niche market?

Is Vietnam ripe for Investment?

The Vietnamese coffee industry is in transition. Coffee prices are low and erratic. Problems have been recognized and solutions mooted, but the fix (not a single fix) is far from complete. The arabica sector is tiny, but there is potential if it gets lots of nurturing. Without recognition of a Vietnamese geographic origin, prices, at the top end may not be sufficiently rewarding. No farmer wishes his or her coffee to be blended into anonymity. So, for Vietnam, the specialty coffee niche must still be massaged into being. It is in incubation.

The most exciting place to invest is the retail sector, where the margins are substantial and the drinks luscious. If one takes a good look at the café sector, one sees great and growing energy, but homework must be done, for investing in Vietnam has its downsides: government bureaucracy, official corruption, lack of transparency, etc. Foreign investors should always approach the market with the help of a local facilitator or “fixer.”

In June, STiR Tea & Coffee contributing editor Frank Miller traveled the length of Vietnam to file this report on a vibrant, fast-growing coffee industry. He wishes to thank the staff at “Care to Help” for their cooperation. This non-profit foundation provides potable water systems to tribal minority villages previously without.

Learn more: www.caretohelp.org