Vietnam Coffee Industry

The varying climate and mountain slopes are ideal for growing different types of coffee. After three decades of rapid expansion and development, the Vietnamese coffee industry has helped Vietnam become the world’s second largest producer and exporter of coffee after Brazil, estimated 1. Lion people in the Central highlands earn their living from the bean. Vietnam now accounts for about 16% of world coffee output; Its coffee production has increased sixteen fold In the past three decades, coffee growing area now totals at 506,000 hectares, from the modest figure of 30,000 hectares by the mild-sass. The magnitude of total output stands In sharp contrast with the dominant unit of production. Small family-run farms whose sizes average 1. 2 hectare, and which have been established only within the last two decades, produce about 85 percent of national output.

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Coffee is one of Viet Name’s most important agricultural export commodities. The coffee sector provided 600,000 permanent Jobs and around 1 million part-time Jobs in 2001, thus contributing to poverty reduction in rural areas. The Vietnamese coffee sector is very export- oriented, with exports accounting for about 95% of the production. The coffee production -which consists mainly of the Robusta variety– has grown very rapidly since the late sass, and Viet Name has over a short period of time established Itself as a mall player among the world exporters.

Viet Name Is today the world’s second arrest exporter In volume terms (after Brazil, with a world market share of some 1 5%), and the third largest exporter In value terms (after Brazil and Columbia). Viet Name is highly competitive as a coffee producer and exporter due to ideal climate and environmental conditions, low production costs, and yields that are among the highest in the world. However, Vietnamese coffee is of relatively low grade due to poor processing, drying facilities, and post-harvest technologies; it does not have a brand name and exporters have still limited marketing skills.

As a result, Vietnamese fee commands lower prices than world average. Viet Name has the potential to upgrade quality of its green coffee exports through investments in research, post- harvest technologies, storage and processing, and by shifting to the production of Arabica variety, which commands higher prices. Other options are niche coffees such as organic coffee, but quantities are small. Domestic processing to soluble coffee Is expanding.

Given Viet Name’s strong world market position, and the opportunities for quality upgrading In processing and post-harvest handling, the export potential for he coffee industry is considered high, but the need for export development Strengths Suitable natural conditions for coffee Low labor and production cost High yield as a result of intense cultivation Good experience in coffee cultivation Concentrated production close to ports Short inland transport distance positively affecting the share of the export price received by Vietnamese farmers Large export market share, especially for Robusta Development of private export Weaknesses Lack of irrigation, overuse of fertilizer and pesticides Over-expansion of coffee area Lack of storage facilities, marketing services

Lack of risk management (for example insurance for coffee producers) Underdevelopment of future market, transaction floors Viet Name standards are inconsistent with international standards No brand name of exported coffee, thus exports through intermediaries Opportunities Recovery of world market Export market diversification Development of wet processing technique Government support to develop brand name, trade promotion Threats Competition from other crops Competition from other exporters Over-expansion of Robusta;lenience plan for Arabica development Unstable export prices Draughtswomen resource limitation Vietnam has overtaken Brazil as the world’s largest coffee exporter when it shipped 1. 6 million tons from the 2011-2012 crop, earning more than IIS$3 billion.

According to the World Bank, apart from over-supply, there are two types of paradigm shifts underlying the current situation: * A structural change in the nature of supply, particularly increases in both the quantity and quality of Brazil and Vietnamese coffees. As a result, the global supply has become more concentrated. Structural changes in demand, comprising increasing demand for high-end, differentiated products, new technology allowing greater flexibility in blending, and geographic-generational shifts in the appeal of different types of coffee products. 0 Paradigm shifts in consumer markets and roaster behavior have occurred in importing countries, and these changes have consequently affected producing countries. * Demand in the major importing countries is growing only slowly. Offset in soluble Form. * New channels for higher quality and differentiated markets are emerging rapidly in many countries. * Roasters have learned to increase their use of natural and Robusta coffees by processes, such as steaming to remove the harshness of taste. * Roasters have learned to work with lower working stocks, but this has increased the logistical demands made on suppliers that favor the largest trading companies. This has led to concentration of the supply chain in the hands of fewer major traders. * Roasters have become more flexible and willing to make short-term switches between coffee types in order to take advantage of lower prices. The concentration of roasters, particularly in a period of oversupply, demonstrates the fact that consumer coffee markets are “far from a model of textbook economic efficiency’ with rapidly clearing markets and without gig-cost barriers to entry (Lindsey 2003). Instead, price responses can be slow and lag well behind perceived changes in events. For instance, reported retail price falls hardly reflect the changes in green coffee prices in the world markets even though, as a report commissioned by the Dutch government states, “At the supply chain down to the countries of origin, there is no evidence of cartel behavior of the roasting industry (ARIAS 2002)”.

The coffee sector’s recent continuous effort for improvement in yield in has been rewarded with the fifth consecutive year where the total area for rowing coffee has exceeded 500,000 hectares and the export value surpassed one million tons. Recent years coffee exports have seen robust growth, with annual revenues of over IIS$2 billion. Coffee growers have benefited from higher crop yields thanks to expanded growing areas and more advanced growing techniques, as well as a better regulated market, which helps farmers reduce losses and increase their earnings. Despite having reached a new record in export volume, the coffee sector still has much to do to make it a sustainable industry. One of the biggest problems acing the coffee sector is planning.

The unplanned expansion of coffee growing areas is seriously affecting the crop yields, the quality of coffee, soil and water resources in many localities. Although Vietnam has become the world’s top coffee exporter, its processing industry is far below world average. The country can process only 10% of its annual coffee output. There are few domestic companies able to produce beans that meet the requirements of foreign roasters and 98% of coffee transactions were still made via intermediaries. Since most of Vietnamese coffee shipments are raw beans, the amounts coffee is still a low value-added sector and remains largely unknown to foreign consumers.

Moreover, Vietnamese coffee market is facing the risk of being captured and manipulated by foreign companies. Domestic exporters are being challenged by high borrowing costs and a shrinking purchasing volume while foreign-invested exporters are more competitive and so far buying up 60% of Vietnamese annual coffee output. Therefore, Vietnam needs to have a long term strategy to maintain its status as the world’s largest coffee exporter and develop the sector in a more sustainable manner. Although the current market situation is rather difficult for coffee producers and Vietnam is now facing many difficulties, coffee development programs are still carried out. We find it necessary to work out an adjustment for both short-term and long- term periods.

This adjustment should be on the basis of different market researches. The key contents of the adjustment should focus on: – Quality Improvement – Production cost reduction – Variety and product shifting, production adjustment to the market demands – Vietnam coffee consumption promotion both in domestic market and to great attention countries – Reorganization of production and export structure in a better scientific, effective, modern and steady way 1 . Quality Improvement for Vietnam coffee – We firstly need to complete the set of Vietnam Coffee Standards in accordance with the International Standards, market demands and in order to protect the interests of Vietnam coffee industry.

A set of coffee standards started to be set up in 1983, and in 1987 it is approved and issued by the State with Coffee Terminologies and Definitions, Export Coffee Technology Standards, and standards on packaging, labeling, storing, transporting… By now there have been some amendments and supplements but it is still necessary that we take completion steps before it can be issued officially and can be referred to in every coffee contracts. – The technique of coffee harvesting, drying, processing and storing etc should also be improved. Vietnam Government is now considering to approved a project on processing of the whole Vietnam coffee industry and it is planned to be carried out within the next 2 years. It is necessary to do researches to transfer advanced technologies to farmers with GAP and IGMP methods; as well as research on preventing mold formation. Programs on organic coffee, gourmet coffee and specialty coffee should be taken into account as well. 2. Production cost reduction This is the key factor to boost the competitiveness of Vietnam coffee. Thus we should work out the investment at the most suitable level which bringing about the most economic effectiveness. One of the ways to reduce production cost is replacing the current varieties with ones of better growing strength, higher resistant to pests and diseases, and higher yield. Another method is recalculating for a most appropriate amount of fertilizer and water to be used.

And it is necessary to work out the most suitable productivity for the highest economic effectiveness (rather than highest productivity). 3. Variety and product shifting, production adjustment to the market demands This will make a big change to coffee industry. In the last few years, Vietnam coffee growers expand their coffee plantations in a spontaneous way without complying with Government’s guidelines and plans. Robusta coffee is grown everywhere possible, from hillsides to hilltops. And Robusta is chosen since they find Arabica coffee growing need more seedlings but not as resistant to diseases, so quire more investment, more cares and more complicated processing method. That’s the reason for the intensification of Vietnam coffee product.

In order to cope with market changes both in the long-term and short-term, Vietnam coffee industry has carried out studies for the adjustments on area, production, and Robusta- the planned area with unsuitable soil and hydrophilic conditions and with weak growing, low productivity will be erased. Robusta plantations in places better suitable for Arabica will be replaced by Arabica. It is still encouraged to develop Arabica fee in suitable places as middle lands and mountainous areas in the North. Therefore, in the next few years Vietnam will have around 300,000 to 400,000 ha under Robusta coffee and around 100,000 ha under Arabica. The total production will then be around 600,000 tons, I. E. 10 million bags, in which 7,5 million bags of Robusta and 2,5 million of Arabica.

The remaining cultivation land in coffee areas will be used for pepper, fruit trees etc. Depend on conditions of each area. During such adjustment we need also take much care of high value products as organic coffee, specialty coffee and gourmet coffee etc. As regard to our traditional export coffee, Vietnam has long been exporting solely green coffee. So we should make some adjustments to produce more of other value added products as soluble coffee and roasted coffee etc. 4. Coffee consumption promotion in the domestic market as well as to great potential countries Vietnam has a population of approximately 70 million people and the per head consumption capacity is merely of 0. 2 to 0. 3 keg/head/year.

With a promotion program conformable to the normal income of the people, Vietnam is managing to achieve the average capacity of 1 keg/head/year. In the next few years, tit the total population increases to 100 million people, the total domestic consumption is estimated at 100. 000 tons. The remaining 500. 000 tons of Vietnam annual production will be for exports. With this strategy, Vietnam is striving to contribute to harmonize the coffee supply-demand balance. 5. Reorganization of production and export structure in a better scientific, modern, effective and steady way Being a not-very-long comer to the world coffee industry, with actually over 1 5 years after entering into the production of coffee, Vietnam should still have so many things to do and to learn.

One of them is to find out how to establish a good management structure as well as what are the main functions of a Coffee Board and Association etc. And the first to be done in the coming time should be to work out a most effective and advanced industry structure since this will create favorable conditions for the industry to develop. We have also thought of establishing a coffee future exchange in Ho Chi Mini City, Vietnam but this need more studies. Vietnam should not be underestimated and assumed to be a “low quality” producer of coffee. Quality improvement measures will be taken up at the same speed as coffee litigation 10 years ago. As long as labor costs remain low and coffee processing know how and technology continues to improve, Vietnam has a bright future.

However, it is also important to mention that Vietnam coffee will not be able to reach the qualities of Kenya, Columbia or other traditional high grown coffees. The international coffee sector is being reshaped at the moment and it is likely that farmers attempting to grow coffee in marginal areas all over the world will be forced to give up their plantations. This painful situation will have to be faced by farmers in Vietnam as elsewhere. Coffee farmers on less favorable land will need support to find new ways of production. Let us hope that coffee farmers in other producing countries have the same flexibility as Vietnamese farmers to adapt to new situations!