historically to have less integration between farmers and international markets. ..... large multinationals like Kraft-Mondelez, Nestle, D.E Master Blenders, JM ...
TOWARDS A MORE COMPETITIVE AND DYNAMIC VALUE CHAIN FOR INDONESIAN COFFEE
Prepared for the Ministry of Trade, the Republic of Indonesia Under the World Bank Technical Assistance Program on Competitiveness and Sustainability of Beverage Crops Funded by the Multi Donor Trust Fund for Trade and Investment Climate Working Paper #7 February 2015
Table of Contents Foreword ........................................................................................................................................... 3 Executive Summary .......................................................................................................................... 4 I. INTRODUCTION: INDONESIA IN THE GLOBAL COFFEE CONTEXT ............................ 9 II. THE CURRENT STATE OF THE INDONESIAN COFFEE SECTOR................................ 13 2.1. Structure and geography of Indonesian coffee production ...................................................... 13 2.2. Production structure and productivity .................................................................................... 16 2.3. Marketing chains .................................................................................................................. 17 2.4. Processing industry .............................................................................................................. 19 2.5. Institutional setting of the Indonesian coffee sector ............................................................... 23 2.6. Export performance .............................................................................................................. 26 III. MAIN CHALLENGES FOR THE FUTURE DEVELOPMENT OF THE INDONESIAN COFFEE SECTOR ....................................................................................................................... 28 3.1. Main issues and challenges ................................................................................................... 28 3.1.1. Improving rural livelihoods and profitability of coffee farming ....................................... 28 3.1.2. Increasing on-farm productivity...................................................................................... 29 3.1.3. Improving land use management and adapting to climate change .................................... 32 3.1.4. Mainstreaming sustainability programs........................................................................... 33 3.1.5. Supporting downstream industrialization ........................................................................ 35 3.1.6. Adding value through quality differentiation and promotion of origin ............................. 37 3.2. Institutional and capacity requirements.................................................................................. 40 3.2.1. Promoting industry partnerships and coordination .......................................................... 40 3.2.2. Improving data collection systems .................................................................................. 41 3.2.3. Enhancing product differentiation, certification schemes and sustainability systems........ 44 3.2.4. Strengthening producer organizations ............................................................................. 46 IV. CONCLUSIONS AND RECOMMENDATIONS FOR THE COFFEE SECTOR ROAD MAP ........................................................................................................................................................ 48 Appendix A ..................................................................................................................................... 53 Appendix B ..................................................................................................................................... 54
List of Figures and Tables Figure 1. Exports of coffee and coffee products by major producers (in metric tons) .......................... 9 Figure 2. Share of Arabica vs. Robusta in global coffee production (percent in volume) ................... 10 Figure 3. Global coffee consumption (1990-2011, in thousands of 60kg bags) ................................. 10 Figure 4. East and Southeast Asia's share of world coffee consumption (1990 – 2012) ..................... 11 Figure 5. Major Indonesian coffee-growing regions ......................................................................... 15 Figure 6. Imports of green beans in Indonesia in tons ....................................................................... 21 Figure 7. Trade in roast and ground coffee from Indonesia in USD .................................................. 21 Figure 8. Trade in soluble coffee from Indonesia in USD ................................................................. 22 Figure 9. Primary pest or disease problems reported by Arabica farmers in three Districts in Eastern Indonesia ......................................................................................................................................... 31 Figure 10. Estimates of coffee production and exports (tons) from different sources......................... 42
Table 1. Production, export and consumption of Arabica and Robusta in Indonesia .......................... 11 Table 2. Coffee production estimates from different sources (2011/2012) ........................................ 13 Table 3. Reported regional differences in coffee yields (2011) ......................................................... 16 Table 4. Comparing coffee productivity in Vietnam and Indonesia .................................................. 17 Table 5. Main export markets for Indonesian soluble coffee in 2012 ................................................ 22 Table 6. Institutional structures across the coffee-producing world................................................... 23 Table 7. Export performance of main coffee exporters (2011 data)................................................... 27 Table 8. Location of major certification programs in the Indonesian coffee sector (January 2014) .... 34
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List of Acronyms and Abbreviations AEKI
Asosiasi Eksportir Kopi Indonesia (Association of Indonesian Coffee Exporters)
ASEAN
Association of South East Asian Nations
BALITTRI
Balai Penelitian Tanaman Industri dan Penyegar (Research Institute for Industrial and Beverage Crops)
EGB
Equivalent Green Bean
GAEKI
Gabungan Eksportir Kopi Indonesia (Indonesian Coffee Exporters Association)
GAIN
Global Agricultural Information Network
GERNAS
Gerakan Revitalisasi Kakao Nasional (National Cocoa Revitalisation Program)
GI
Geographical Indication
ICCRI
Indonesian Coffee and Cocoa Research Institute
ICO
International Coffee Organization
IDH
Sustainable Trade Initiative
IFC
International Finance Corporation
IDR
Indonesian Rupiah
KUD
Koperasi Unit Desa (Village-level cooperative)
PTPN
Perusahaan Terbatas Perkebunan Nusantara (Nusantara Plantation Company)
R&G
Roast and Ground
SCAA
Specialty Coffee Association of America
SCAI
Specialty Coffee Association of Indonesia
SUSENAS
Survei Sosio-Ekonomi Nasional (National Socio-economic Survey)
UPH
Unit Pengolahan Hasil (Farmer-managed coffee processing units)
VSS
Voluntary Sustainability Standards
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Foreword This document is the final output of the technical work carried out in preparation for the roundtable on the coffee sector of Indonesia organized by the Ministry of Trade in February 2014 with representatives of government and stakeholders, and further research and consultations carried out after the roundtable. It is based on a presentation and draft report prepared by Jeffrey Neilson, consultant and lead author. The report was revised and completed by Patrick Labaste and Steven Jaffee of the World Bank, with inputs and comments from Luz Diaz-Rios and Mariam Rikhana of the World Bank and Ernest Bethe, Rick van der Kamp, Rahmad Syakib, and Andi Wahyuni Sofiyanti Baso of the IFC. The report presents the main elements of the sector situation assessment and lays out a set of options and proposals including policy measures, actions and initiatives that could be considered to address the issues facing the coffee sector of Indonesia and put it on a more sustainable growth path in the future. This activity was carried out in the framework of the technical assistance program on competitiveness and sustainability of beverage crops value chains - coffee, cocoa, and tea - in Indonesia launched in 2012 with the Ministry of Trade with the support of the Multi-donor Trust Fund on Trade and Investment Climate (MDF-TIC). The technical assistance program is implemented by the World Bank. This technical assistance is contributing to broader efforts by the Government to increase growth and value addition, promote more sustainable production practices, and reduce poverty.
The views expressed in this publication are those of the authors and not necessarily those of the World Bank Group, or of the organizations that support the MDF-TIC. Cite this report as: Neilson, J., Labaste, P. and Jaffee, S.. (2015). Towards a more competitive and dynamic value chain for Indonesian coffee-Working Paper #7. Prepared for the World Bank, Washington DC.
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Executive Summary State of the coffee sector in Indonesia Indonesia is a major producer and exporter of coffee. In terms of volume, it competes with Colombia as the world’s third largest producer and exporter. Green bean exports account for between 70 and 80% of the crop. The export of soluble coffee is also important and Indonesia is the second largest global exporter of Robusta soluble after Côte d’Ivoire. Indonesia consumes approximately 20% of its own harvest domestically. The Indonesian coffee sector is large, internally diverse and scattered. Production is dominated by an estimated 2 million smallholders living in often remote villages located right across the archipelago—with different coffee regions showing variations in terms of production systems, environmental conditions, product quality, post-harvest processing, value chain structures and institutional supports. This distinctive industrial geography poses challenges for logistics, for supporting improved technologies, and for developing cohesive industry organizations. Common to most of the coffee producing regions are circumstances of low yields, weak farmer organization, and limited government support—as coffee has hitherto not been regarded as a crop of strategic importance. This previous lack of specific attention presents an exciting opportunity for the government to significantly improve development prospects within the sector. This is important due to the large number of individuals (estimated at around 10 million) whose lives are shaped by coffee through own agricultural production, being dependent on a producer, as seasonal farm labour, and through employment in trade, processing and retail. Many of these rural livelihoods are precarious and most of the 2 million poverty-line households are expected to remain in coffee production in the foreseeable future despite expanding opportunities in other sectors. The coffee sector, therefore, holds particular strategic importance for rural poverty reduction in Indonesia. Support for coffee production is also strategically important to ensure the long-term supply of raw materials for the dynamic domestic processing sector. Indonesia produces both Arabica and Robusta coffees, with the latter accounting for 85% of the total. The Robusta sub-sector in southern Sumatra dominates national production and has tended historically to have less integration between farmers and international markets. It has, however, supported recent dynamic growth within the downstream processing sector, which has begun penetrating export markets in addition to meeting Indonesia’s considerable domestic demand. The growing Arabica sub-sector offers farmers the opportunity to access higher quality specialty markets, and has recently witnessed quality-related product differentiation and the transfer of knowledge and technology from international buyers to farmers. Global coffee consumption was estimated by the ICO at 142 million bags in 2012 and is expected to increase further in the coming years; under conservative growth estimates, global coffee consumption could reach over 150 million bags (1 bag = 60 kg of green coffee beans) by the end of the decade. While growth in traditional/developed markets has been slowing, several drivers 4
have nurtured market expansion, in particular: (i) the rise of the ‘specialty industry’ in developed markets in the past two and a half decades, (ii) the mainstreaming of sustainability labels and certifications, (iii) the remarkable growth of the espresso industry, and (iv) the strong growth in the market for soluble coffee in East and South-East Asia. This situation presents both challenges and opportunities for future development of the Indonesian coffee sector.
Main recommendations for government and/or private industry action Going forward, there are basically two different scenarios for the coffee industry in Indonesia. The first scenario would be a ‘business-as-usual’ scenario whereby the sector will continue to move along at its current level of output without facing any major issues or threats. Performance will remain below that of major competitors. The country would continue to struggle to reposition itself in the new fast-growing domestic and regional markets, for Robusta coffees. Yields would remain very low compared to major competitors and farmers would not have the means to invest in improving cultivation practices and rejuvenating their plantations. This would not put Indonesia on a sound and sustainable competitive position even on the low value/high volume market for coffee. Nor does it offer any bright prospects for the majority of the 2 million farm households involved in the sector. Under the second, more ambitious scenario, Indonesia has the potential and the opportunity to position itself more strategically and more dynamically in the global value chains for coffee by engaging and consolidating opportunities through : (i) product upgrading (quality differentiation); (ii) functional upgrading (downstream processing of raw beans); and (iii) process upgrading (improved farm-level productivity). Given the limited capacity, and coffeespecific expertise, within existing Government structures, these upgrading trajectories are most likely to occur through strategically identifying opportunities, resources and points of leverage from within the value chain itself and partnering with the private sector. The government should develop opportunities to leverage resources (particularly for farmer training) from the private sector to support farm-level development through innovative public-private partnerships. To achieve the above vision, there are a number of areas where government could play a critical role to put the sector on a more dynamic and sustainable growth path, improve farm incomes and provide environmental benefits, as well as contribute to reducing rural poverty. Possible initiatives include: (1) Building stronger sector institutions on the basis of strong stakeholder involvement. Improved national-level industry coordination would help harness the high-degree of private sector interest and involvement in activities throughout the value chain. The Government of Indonesia could establish the equivalent of an ‘Indonesian Coffee Board’ or ‘Dewan Kopi Indonesia’ in a similar structure to the existing ‘Dewan Kakao Indonesia’. 5
This could perform a high-level coordination function for the industry, but involve only modest staffing. The Board would liaise with and support Public Private Partnership (PPP) organizational structures that would be responsible for implementing development activities in producing regions. The IDH-supported Sustainable Coffee Program, with its secretariat in Jakarta, is emerging as an effective PPP-like organizational form in the Robusta sub-sector that could be further supported by the Board and the Ministry of Trade. The absence of an active coffee farmers association in Indonesia, and the subsequent lack of legitimate representation in policy debates and program accountability, presents a further limitation to industry development. The Government of Indonesia, presumably though the Ministry of Agriculture, could support a coffee farmers association (such as APKI) and establish a results-based capacity building fund and implement needed training and advisory programs. (2) Promoting private sector led partnership models involving farmers, traders and roasters/processors that encourage knowledge transfer regarding quality requirements, environmental management and productivity improvements. Such innovative models of Public-Private Partnership (PPPs), such as those being developed through the PisAgro initiative, would enable government to effectively harness private sector dynamism to deliver improved technical and agronomic services to Indonesian coffee farmers, including in relation to soil nutrition, replanting and pest management. This could be done through a competitive and results-based (or outcome-based) matching grant mechanism open to both domestic and foreign operators and other key service providers and even organized producers, which could support and encourage private investment in replanting initiatives, agricultural extension activities and applied research. (3) Putting in place a solid and reliable data and information system in the sector. This would include the development of enhanced data collection techniques to develop a national coffee database, which might include integration with other available data sources (eg. trade data and the National Agricultural Census). It would appear that there are essentially two alternative approaches here: i) developing the capacity of existing public institutions, such as the National Statistics Agency (BPS) or Ditjen Perkebunan (the Directorate General for Estate Crops), to collect and manage coffee data (although this would presumably need to be integrated within new data collection systems right across the Indonesian agricultural sector ii) support coffee-specific data collection systems within a Public-Private Partnership (PPP) that would harness the data collected by private sector partners (a similar initiative is currently being undertaken in the cocoa sector through the Cocoa Sustainability Partnership). (4) Promoting coffee-based agroforestry farming systems. Coffee is currently incorporated within several community-based forestry programs across Indonesia, and could be further promoted as part of broader initiatives to improve hydrological functions within degraded lands. Mixed agro-forestry systems could help to minimize the environmental footprint of coffee cultivation, increase ecosystem benefits, and contribute to improved risk management for rural livelihoods. The Ministry of Forestry is ultimately responsible for regulating community forestry programs in Indonesia and could be 6
supported to ensure necessary regulatory reforms are undertaken. This could be supplemented by an active community support program for coffee-based agroforestry development in selected locations, with the provision of coffee-specific technical advice. (5) Support the role of sustainability programs in the sector. The establishment of a new national standard (eg. ‘IS Kopi’) to compete with existing certification standards is not recommended. Careful consideration and study of the costs, benefits and underlying rationales associated with certification schemes and sustainability programs are still required. Instead, the Ministry of Trade and the suggested Indonesian Coffee Board could alternatively provide appropriate support for private sector sustainability programs in the sector to ensure development outcomes are maximized for participating farmers. Furthermore, the Government could ensure that existing certification requirements are appropriately embedded within Indonesian legislation and to align regulations on issues such as banned chemicals and land use change. A non-competitive government standard that augments and strengthens existing marks would be far more desirable than a new competing mark. (6) Support the effective development of Geographical Indications (GIs). While eight GIs have already been established in the Indonesian coffee sector, the development benefits of these initiatives remain unclear and untested, and the GIs remain virtually unknown in the international coffee market. A much improved understanding of how GIs could contribute to economic development is required, and a convincing argument about the benefits of a GI needs to be better articulated to ensure private sector engagement. In order to progress with the use of GIs as a rural development tool, an evaluation of the impacts of existing GIs in Indonesia is urgently required alongside a review of the regulatory framework for GIs. Such a review would be timely and provide a solid platform to proceed with the institutional improvements required to allow the potential benefits of GIs to be realized in the sector. This would lead to a convincing ‘theory of change’ about the benefits of GIs that would support an awareness-raising campaign amongst private sector actors. (7) Ensuring a supportive policy framework for downstream industrialization. Substantial growth potential exists for the downstream processing of Robusta coffee into instant coffees, 3-in-1 coffees and Ready-to-Drink products for both the domestic and international markets. This growth is likely to occur through relatively large-scale investments due to the technological requirements in this processing sub-sector. The roasting of Indonesian Arabica coffees, on the other hand, is more likely to occur through SMEs and will likely remain focused on the growing domestic specialty coffee market in the foreseeable future rather than export markets. In both cases, an open trade regime is required to ensure that processors have access to a variety of international coffees as required for blending purposes, even though the total volume of green coffee imports is expected to remain low. Similarly, foreign investment in downstream processing is expected to continue performing a critical role in stimulating innovation and competitiveness in the sector. There may be scope for the government to develop an incentive framework to encourage investment in these activities by both foreign and 7
domestic investors, although placing restrictions on the export of unprocessed coffee is not recommended.
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I. INTRODUCTION: INDONESIA IN THE GLOBAL COFFEE CONTEXT Indonesia has been a leading coffee producer for centuries, and, in recent years, it has competed with Colombia to be the world’s third largest producer (after Brazil and Vietnam) . Export volumes, however, have not increased significantly in the past couple of decades, and, since 1990, have oscillated between 300,000 and 500,000 tons per year (Figure 1).
Figure 1. Exports of coffee and coffee products by major producers (in metric tons)
Source: J. Neilson, compiled from UNCOMTRADE, 2014 (HS0901)
According to official statistics, the country has an estimated 1.2 million hectares planted with coffee trees. 95% of this area is cultivated by more than 2 million small holders who rely on the sale of coffee beans as a major source of cash income. Approximately 86% of the area is under Robusta, the rest under Arabica. Over the last decade there has been a downward trend in the area under Robusta, whereas the area under Arabica has been increasing. Overall volume of coffee consumption in the established markets of the USA, Japan, and the European Union has not significantly increased since 1990, while coffee consumption in the emerging markets, particularly in Russia and in major producing countries such as Brazil and Indonesia, has been increasing at an accelerated rate (Figure 3). In the USA, specialty coffee is now estimated to represent 50% of the national coffee market in value terms—up from about 30% in 2000. While consumers in established markets are not drinking noticeably more coffee, they are drinking better quality coffee. While Arabica coffee has long enjoyed a more dynamic market, average annual growth rates during the 1979/80 to 2013/14 period show Robusta outpacing Arabica --3.6 percent vs. 0.9 9
percent. As a result and as shown in the Figure 2 below, Robusta's relative share in coffee production worldwide has increased from 23 percent in 1979 to above 43 percent in 2013. Figure 2. Share of Arabica vs. Robusta in global coffee production (percent in volume)
Source: Diaz Rios, June 2014, based on USDA data
Figure 3. Global coffee consumption (1990-2011, in thousands of 60kg bags)
Figure 3. Global coffee consumption (1990-2011, in thousands of 60kg bags)
Source: J. Neilson, compiled from ICO (2014) NB: ‘Other Emerging Countries’ refers to all other markets (includes the former Eastern Bloc, North Africa and much of non-tropical Asia)
Coffee consumption in East and Southeast Asia has been increasing faster than in the rest of the world, as shown in Figure 4 below. Whereas total coffee imports into China remain at less than 1% of world consumption, they increased nearly five-fold between 2000 and 2012, according to ICO data, and are expected to increase further in the years ahead.
10
Figure 4. East and Southeast Asia's share of world coffee consumption (1990 – 2012)
Source: ICO (2014)
These dynamic trends in the world coffee market provide the setting for Indonesia’s industry and
the context of this study. Table 1 below shows the overall estimates of production and consumption of coffee in Indonesia in recent years. It is estimated that 70-80% of all Arabica coffee produced in Indonesia is sold as speciality coffee which fetches 30-40% price premiums on world markets. Starbucks is the leading buyer of this speciality coffee. Table 1. Production, export and consumption of Arabica and Robusta in Indonesia
Arabica production (‘000 bags) Robusta production (‘000 bags) Total Green Bean (GB) exports (‘000 bags) % of total production *Arabica GB export (‘000 bags) *Robusta GB export (‘000 bags) Roast/ground export (‘000 bags) Soluble export (‘000 bags) Roast/ground domestic consumption (‘000 bags) % of total production for roast/ground domestic consumption Soluble domestic consumption (‘000 bags) GB Imports (‘000 bags) Roast/ground imports (‘000 bags)
2010/11
2011/12
2012/2013
2013/2014
1,375 7,950 7,375 79 1,106 6,269 0 2,305 1,250
1,300 7,000 5,750 69 863 4,886 0 1,500 1,600
1,700 8,800 6,900 66
1,650 7,850 6,000 63
0 2,000 2,040
0 1,800 2,070
13
19
19
22
100 185 0
180 600 135
300 150
200 175
Source: USDA Indonesia Coffee Annual Reports 2011, 2012, 2013, 2014 *Estimated by A. Sendall, 2013
The coffee industry in Indonesia is generally considered to be performing well below its full potential. There have not been any significant increase in yields and overall production has remained more or less stagnant since 1990. The relatively high world prices for coffee since 2007 have not resulted in a corresponding increase in farmer investment and coffee output in 11
Indonesia. However, the large number of Indonesian rural households involved in smallholder coffee farming suggests that improved productivity in the sector could contribute further to poverty reduction and livelihood resilience in the country. This report is structured as follows. Chapter 2 provides an analysis of the current structure and performance of Indonesia’s coffee sector and includes some benchmarking of that performance against other major coffee exporting countries. Chapter 3 highlights a number of challenges and opportunities — based on the detailed assessment of issues and performance—to bring about improved productivity, sustainability and competitiveness in the sector. The final section provides conclusions and recommendations for a road map that would enable the industry to realize its full potential.
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II. THE CURRENT STATE OF THE INDONESIAN COFFEE SECTOR 2.1. Structure and geography of Indonesian coffee production An estimated 95 percent of total land planted with coffee - estimated by the government at 1.2 million hectares in 2011 - is managed by smallholders, and about 90% of this is in the outer islands of the Indonesian archipelago (Ministry of Agriculture, 2013). These smallholders generally manage a mixed coffee farm with an average size of one hectare. Unlike several other producing countries, such as India, Brazil and Colombia, there are virtually no medium-size independent coffee planters in Indonesia. The large estate sector is relatively unimportant, and consists entirely of either corporate actors or state-owned enterprises (PTPNs). Indonesian production is dominated by Robusta plantings (approximately 85% of total production). The country is predominantly a producer of lower-quality Robusta coffee, which is either: i) exported as green beans; ii) processed for consumption in the growing domestic market; or iii) processed for sale into export markets. Table 2 provides estimates of regional production - based on field observations, stakeholder interviews, and trade data compared to official government (Ditjen Perkebunan) data, ICO data and the USDA GAIN report estimates. Note the significant differences among these figures/estimates. Table 2. Coffee production estimates from different sources (2011/2012) Author’s estimates (‘average’ year) Region Southern Sumatra (Lampung, Sumsel, Bengkulu) Jambi and West Sumatra Aceh North Sumatra Java Sulawesi Flores / NTT / Bali Papua / Papua Barat Other Total production Exports (ICO 2011/12) Exports (ICO 2012/13)
Arabica Robusta 1,000 300,000
2,500
25,000
35,000 25,000 15,000 4,000 2,500 200 500 85,700
10,000 15,000 10,000 10,000 20,000 500 25,000 415,500
60,995
313,778
75,114
471,671
Ditjen 2011 Data (A+R)
ICO average (2005-2012)
GAIN Report (2011-2014 average) Arabica
Robusta
356,574
52,281 56,834 62,188 45,325 19,917 1,666 43,862 638,647
534,405
92,000
465,000
Source: J. Neilson (2014)
Coffee, however, is produced right across the archipelago (Figure 5). Robusta production is concentrated in southern Sumatra (generally in the three provinces of Lampung, South Sumatra and Bengkulu), which are estimated to produce approximately 60% of Indonesian national 13
production. One can distinguish at least seven regional sub-industries, in declining order of importance: i) The southern Sumatra Robusta complex (primarily Lampung, South Sumatra and Bengkulu, but could also be considered to extend in to Jambi and West Sumatra), with exports through the port of Bandar Lampung, ii) The Acehnese Arabica industry, with exports through the port of Medan, iii) The North Sumatra Arabica industry, with exports through the port of Medan, iv) The East Javanese estate sector, dominated by state-owned enterprises (PTPNs) and with exports through Surabaya, v) The Javanese smallholder production regions, now spread across West, Central and East Java, with exports primarily through Semarang and Surabaya, vi) The Sulawesi Arabica coffee region, with exports through Makassar. vii) The Balinese and Nusa Tenggara (Flores and a lesser extent Sumbawa and Lombok) coffee districts in both Arabica and Robusta, which is exported through the port of Surabaya. The coffee regions of Indonesia vary considerably in terms of production systems, coffee quality, post-harvest processing, value chain structures, institutional support structures, the role of the private sector, and environmental conditions. This distinctive industrial geography, involving multiple sub-industries following from Indonesia’s physical geography, has a range of implications for sector development in terms of logistics, developing cohesive industry organizations, and building a national reputation or brand. The costs of transporting coffee within Indonesia are extremely high, frequently disadvantaging those producers not proximate to the main export hubs. The variability of regional agricultural production systems means that on-farm agronomic challenges also vary and generally require regionally-tailored interventions. There is relatively little information exchange or knowledge-sharing between regions, making a nationally-coordinated development strategy problematic and suggesting the need for several regionally-oriented programs of intervention. Finally, the considerable diversity in coffee quality across these regions suggests specific challenges for national-level marketing initiatives. Thus, it is difficult to talk about key characteristics of the ‘Indonesian coffee industry’ as a whole.
14
Figure 5. Major Indonesian coffee-growing regions
Source: Neilson (2008)
The Government of Indonesia estimates that there were around 1.2 million hectares planted with coffee in 2011 (of which 76% is Robusta and 24% Arabica), although it is difficult to find a proper assessment of the composition of coffee plantations in terms of varieties and age classes. The Ministry of Agriculture estimates that 60% of Indonesia’s coffee trees are more than 25 years old and in 2012 allocated nearly IDR143 billion (13 million USD) for Arabica expansion and Robusta rejuvenation. This indicates that, although statistics may not be completely accurate, there is a need for continued rejuvenation and infilling, especially for Robusta. Exports are dominated by three ports: Bandar Lampung (southern Sumatra), which accounts for approximately 70% of total exports; and Medan (northern Sumatra) and Surabaya (Java), which together account for another 25% (BPS, 2012). It shows the strategic importance of the Bandar Lampung port at the southern tip of Sumatra. Medan and Makassar primarily export Arabica coffee, while Surabaya exports both Robusta and Arabica. This provides another relatively accurate proxy indicator of production geography within Indonesia. A key limitation of using trade data as a proxy for production geography includes a neglect of inter-island trade prior to export. This is particularly the case for recorded exports from Surabaya, since Surabaya is also a hub for coffee grown in the relatively minor growing regions of Bali and Nusa Tenggara. Exports from Javanese ports (as a proxy for production) are further complicated by the fact that domestic coffee processing and consumption is concentrated on Java. 15
2.2. Production structure and productivity As noted above, coffee, in Indonesia, is primarily a smallholder crop. A large-scale corporate sector has existed in the Indonesian coffee sector since the colonial period, yet has shown little dynamism in recent decades. Coffee farmers typically derive 40% of their household income from coffee production. Coffee is part of a broader livelihood strategy. While it is difficult to generalize, a typical Indonesian coffee farmer cultivates one hectare of coffee alongside other tree crops, such a cocoa, fruit trees, and pepper, and is likely to grow rice or corn for the household's own consumption. The government agency for estate crops estimates national average yields to be 702kg/ha (Ministry of Agriculture, 2013), although this is likely to be something of an overestimate. Irrespectively, it is still very low compared to Brazilian average yields of 1,200kg/ha for Arabica and 1,800kg/ha for Robusta1. The smallholder basis of production presents its own challenges. Smallholders are typically constrained by limited financial capacity to purchase inputs and pay for hired labor. Decisions are made on how best to utilise their limited resources based upon household food security and income requirements, while minimizing the risks. Low yields are attributable to the age of most coffee trees (over 25 years old) when production starts to decline, lack of pruning, low levels of fertiliser use and pests such as Coffee Berry Borer (CBB). It is estimated up to 20% of the Robusta crop is affected by CBB, even though Hypotan attractant and Broca traps appear effective in their control. Although most inputs, such as quality planting material and fertilisers are available, farmers lack the finances to purchase them and opt for lower yields with minimum inputs. The lower elevation Robusta areas offer more opportunity for substitution with other crops, such as oil palm, that are perceived to offer potentially higher net returns.As shown in Table 3 below, yields are not only low on average but also quite different from region to region. Table 3. Reported regional differences in coffee yields (2011) Province
Yield (Kg/ha)
Aceh
676
North Sumatra
1,019
South Sumatra
1,004
Lampung
631
East Java
561
Data source: Directorate general of Estate Crops, 2013
Coffee yields per hectare are considerably lower in Indonesia than in Vietnam which is Indonesia's direct competitor in the high volume/low cost market of Robusta coffee (Table 4). 1
Brando C (2012) P&A International Marketing.
16
Despite higher costs of production, partly due to farm-level investments, in Vietnam, Table 4 suggests much higher levels of profitability in terms of coffee harvest per hectare. Other estimates2 suggest that Indonesian farmers only produce an average of around 600 Kg/ha compared to Vietnam’s 3,000kg/ha, where management is intensive. Indonesia’s low yields are a result of decades of neglect of smallholder plantations. In addition, the costs of labor, energy and logistics are lower in Vietnam than in Indonesia. Notwithstanding serious concerns over the long-term sustainability of yields in Vietnam (see, for example, D’haeze et al., 2003; 2005), it is clear that Indonesian producers are at a current competitive disadvantage even in this category of producers 3. Table 4. Comparing coffee productivity in Vietnam and Indonesia (Robusta) Indonesia
Vietnam
Production cost (USD/tonne)
574
1,087
Average yield (Kg of green beans/ha)
800
2,400
Net margin (USD/ha)
873
1,447
Data Source: IDH (2014)
2.3. Marketing chains Indonesian coffee production has been oriented towards export markets ever since it was introduced by the Dutch in the late 17th century. The export markets for Indonesian Robusta and Arabica are quite distinct. Export destinations fluctuate more for Robusta than for Arabica, as Indonesian Robusta can be quite easily substituted with that from other origins, especially with Vietnam. While traditional consumer markets in Western Europe and North America still remain key markets for Indonesian Robusta, increasing volumes are now being exported to emerging economies, such as Algeria, Malaysia, the Philippines and Russia. Smaller volumes of higher-quality Arabica coffee are also produced and sold into more qualitysensitive coffee markets, with major buyers in the United States, Japan and Western Europe. Export markets for Indonesian Arabica tend to be more stable. Global demand for specialty coffee is growing, providing an opportunity for smallholder farmers in Indonesia to upgrade the quality of the coffee they produce and to become linked to these higher-priced value chains. Indonesia's Arabica coffee is generally sold as ‘specialty coffee’. The Government of Indonesia has recognized the development potential of specialty coffee through the establishment of a Specialty Coffee Development Program, commencing in 2010. Because of the competitive structure of the value chain for Arabica specialty coffee, which results in farm gate prices being up to 70-80% of FOB prices, farmers directly benefit from the price premiums. The production of specialty Arabica in Indonesia is highly concentrated in northern Sumatra across the two provinces of North Sumatra and Aceh, from where coffee is commonly traded 2 3
De Wolf, 2013. Sendall, 2013.
17
internationally under the trade names of Gayo, Lintong and Mandheling. Other important Arabica-growing regions include Central and East Java, dominated by government-owned estates such as Kayu Mas and Dampit. Other small Arabica-growing regions include South Sulawesi (Toraja and Kalosi), Bali (Kintamani) and Flores (Bajawa). Despite producing relatively small volumes of coffee, these origins have good reputation in international specialty coffee markets, and can be highly sought after by specialty buyers. Domestic coffee consumption has increased significantly in recent years, although much uncertainty surrounds the actual size of the domestic market. Domestic coffee consumption in Indonesia is conventionally calculated as the difference between official production data and recorded exports, but due to the poor quality of production data, this may be inaccurate. Based on household consumption data (SUSENAS), per capita coffee consumption in Indonesia was estimated at 1.3kg/capita/year between 2008 and 2012 (Ministry of Agriculture, 2013), which would equate to an unlikely 300,000 tons/year. The ICO estimates domestic consumption at around 200,000 tons/year, while the USDA’s Gain report (2013) estimates that 154,800 tons will be required for domestic consumption in the 2013/2014 financial year. Coffee value chains have been transforming over the past couple of decades, in Indonesia as elsewhere. The global value chain for coffee is characterized by an increasing degree of influence (governance) enacted by large multinational roasting companies. However, market concentration in the global roasting sector has been somewhat buffered by growth in the specialty coffee sector, which tends to favor small and medium size firms. The influence of roasting firms - including large multinationals like Kraft-Mondelez, Nestle, D.E Master Blenders, JM Smucker, Elite, Tchibo, Starbucks and Lavazza - is increasingly evident in the growing regions of Indonesia, with Nestle operating an instant coffee processing plant in Lampung. For the most part, however, coffee roasters generally rely on international trading companies to source coffee from producing countries on their behalf, working with international trading companies, such as Ecom Agroindustrial Corp (Indocafco in Indonesia), Armajaro Trading, Olam International, Louis Dreyfus Group, ED&F Man (Volcafe), and Amtrada (Nedcoffee and Daarnhouwer). As recently as 20 years ago, international trading companies depended on local exporting firms in Indonesia to source coffee on their behalf. This has now changed. There has been a gradual trend in recent decades for these international trading companies, usually with headquarters in Western Europe and North America, to integrate their activities upstream into producing countries, and all of the above companies maintain a presence as coffee exporters within Indonesia. As specialist supply chain managers, with vast international experience and generally with access to cheaper finance than Indonesian exporters, foreign trading companies are now responsible for an estimated 50% of Indonesian coffee exports. In 2012, for example, six international firms were responsible for 51% of green bean exports from Bandar Lampung (based on AEKI data). The capacity to successfully implement supply chain sustainability programs is an increasingly important aspect of competitiveness for these traders, and many are now actively coordinating tight supply chains back to the farm-level in Indonesia. 18
Across Indonesia, however, farm-level marketing of coffee continues to generally involve small farmers maintaining relationships with first-stage collectors (sometimes known as tengkulak), who either purchase coffee at the farm-gate or through traditional village markets. Arabica coffee is often sold by farmers as semi-dried parchment coffee for subsequent processing at centralized mills, while Robusta is dry-processed and hulled at the farm level, being sold into extended supply chains as Asalan (unsorted and ungraded) green beans. It is common for coffee to change hands three or four times along traditional trade networks before reaching processing mills or exporters. The role of the first-stage collector in this network is particularly important, frequently offering a line of credit to farmers in return for an exclusive supply arrangement, thereby interlinking product marketing and credit markets. Notwithstanding farmer allegations of profiteering and price fixing by village collectors, these collectors also perform an important value chain function by connecting farmers to a mill or larger trader. Such collectors can provide various services to farmers: product marketing, money lending, and merchandising (the latter involving the sale of items like rice, sugar, and fertilisers). While extended trade networks are widely portrayed as contributing to the impoverishment of farmer communities, this lender is operating in a setting where formal credit is mostly unavailable and so is providing important services to farmers. These traditional marketing chains can actually be relatively efficient, with survey data suggesting that coffee farmers regularly receiving around 75% of the export price for coffee expressed in GBE. 2.4. Processing industry The overall picture of the coffee processing sector in Indonesia appears to be that of a dynamic and growing segment of the economy that is benefitting from enhanced integration within global, or at least, regional production networks. According to the Indonesian Ministry of Industry, 70 coffee factories were registered across Indonesia in 2009, although there would be several hundred more SMEs active in the sector. As an economic activity, coffee-roasting covers a highly diverse range of activities from open-fire and kettle drums in local markets to industrial state-of-the-art factories. The production of instant coffees and ready-to-drink products requires substantial investment. Kumar (2011) claims that four established brands make up 46% of the domestic market. The Surabaya-based Kapal Api Group (Santos Jaya Abadi), with popular brands like Kapal Api, ABC and Good Day, has long been the leading player in the domestic market. Other leading players in the domestic market include PT Mayora Indah (Torabika coffee), PT Nestle Indonesia (Nescafe), PT Jaya International Indonesia (Indocafe), and Wings Corporation (Top Coffee). In particular, Indonesian companies have developed so-called ‘3-in-1’ coffee products, with premixed packets of instant coffee, sugar and milk, which according to Diaz Rios (2013b) accounts for 30 percent of the Indonesian market. In the larger urban areas of Indonesia, out-of-home coffee consumption in cafes and shopping malls has grown rapidly over the last decade. This has involved the emergence of a café culture, 19
an appreciation of higher quality coffees, and a boom in both independent cafes and larger roaster-retailer chains. International roaster-retailer firms, such as Starbucks (with 147 stores across Indonesia in 2013), Coffee Bean and Tea Leaf (47 stores), and Black Canyon Coffee (31 stores) have now established a strong presence in Indonesia alongside domestic coffee chains, such as J. Co Donuts and Coffee (owned by the Johnny Andrean Group with 135 stores) and Excelso (owned by the Kapal Api Group, with around 100 stores). Some smaller independent cafes in cities like Jakarta, Bandung and Surabaya, also source high quality coffees directly from producing regions and compete with export-oriented supply chains that have traditionally dominated in these specialty regions. The specialty coffee roasting sector replicates artisanal production in many ways, and urban-based, high-quality SMEs are active in this sub-sector. The skill-level required for specialty coffee roasting, however, is considerable, and presents a considerable entry barrier for rural producers. In line with a dynamic processing sector, Indonesia is now importing a greater volume of green coffee (based on UNCOMTRADE data), from a 5-year average of 977 tons (1990-1994) to 23,635 tons (2009-2013), including a sharp increase recorded in 2012 (Figure 6). While these imports have been a source of concern for some industry and government actors (ie. a threat to Indonesian coffee farmers), it should be emphasized that this represents only 3 to 5% of domestic production. More accurately, such imports reflect an increasingly sophisticated processing sector with specific input demands that is integrated into global production networks. Imports of Roast & Ground coffee products have also remained low and were below R&G exports in 2012 (Figure 7). So, for the most part, the domestic coffee market has generally been satisfied by domestic production.
20
Figure 6. Imports of green beans in Indonesia in tons (HS Codes 90111 and 90112) 60,000 50,000 40,000 30,000 20,000 10,000 2008
2009
2010
2011
2012
2013
Source: J. Neilson, based on UnComtrade data (2014)
Figure 7. Trade in roast and ground coffee from Indonesia in USD
Source: J. Neilson, based on UNCOMTRADE data (2014)
Domestic coffee manufacturers, moreover, have successfully leveraged their domestic experience to launch products into the export market, as reflected in the continued growth of exports of instant coffees from Indonesia since 2008 (Figure 8), which are far more valuable than regular R&G exports as shown in Figure 7. These products have been successful in penetrating ASEAN markets and other emerging markets (Table 5).
21
Figure 8. Trade in soluble coffee from Indonesia in USD (HS Codes 210111 and 210112) 350,000,000 300,000,000 250,000,000
200,000,000 150,000,000
100,000,000 50,000,000 -
2008
2009
Soluble coffee exports
2010
2011
2012
2013
Soluble coffee imports
Source: J. Neilson, based on UnComtrade data (2014)
Table 5. Main export markets for Indonesian soluble coffee in 2012 (HS Codes 210111 and 210112) Country Philippines
USD ‘000 223,729
Malaysia
37,812
Singapore
10,841
Vietnam
7,070
China (incl.. Hong Kong)
6,670
Thailand
5,634
East Timor
4,414
Japan
3,130
United Arab Emirates
2,100
Pakistan
1,149
Other Countries
14,746
Source: J. Neilson, based on UnComtrade data (2014)
22
International trade in instant coffees has grown at a faster rate than trade in both green beans and roasted coffees over the last decade, and there has been a trend towards the production of instant coffees within producing countries. The Indonesian coffee processing sector is capitalizing on these export opportunities. Indeed, the potential for further growth in this instant coffee subsector is supported by broader trends in global coffee consumption. The export potential in the R&G sub-sector, however, is far more constrained than the instant coffee and ready-to-drink market segments. Coffee roasting firms, particular in the high quality specialty markets, have tended to locate proximate to their consumers and to modify product characteristics (and perhaps even more importantly marketing strategies) to satisfy changing consumer preferences. Leading coffee brands will also attempt to standardize taste profiles year on year, and this can only be achieved by skillfully blending different origins from across the entire coffee-producing world. This requirement for blending of different origins can also impose limitations on producingcountry processing unless an open trade regime is maintained for green bean imports. Some destination markets, such as the EU, impose escalating tariffs on processed products to protect domestic industries within the EU and this may affect the competitiveness of Indonesian roasted coffees into those markets. 2.5. Institutional setting of the Indonesian coffee sector Unlike leading producing countries in Latin America, Indonesia does not have an equivalent national coffee authority/institution that coordinates sectoral development. The result is a highly fractured institutional setting. Table 6 lists the institutional organisations found on other countries4. There are currently three principal organizations involved in national-level coffee industry development in Indonesia: (i) the Ministry of Agriculture; (ii) the Association of Indonesian Coffee Exporters (AEKI); and (iii) the Indonesian Coffee and Cocoa Research Institute (ICCRI). Table 6. Institutional structures for sector policy setting across the coffee-producing world Country Brazil Cameroon
Colombia
Lead Organization / Entity Conselho Deliberativo da Politica do Café (CDPC) Office National du Cacao et du Cafe
Year Est. 1986
National Coffee Committee (coordinated by the National Federation of Coffee Growers
1927 (FNC)
1991
Legal nature Government Body linked to Ministry of Agriculture Public Legal Entity (under Ministry in charge of commercialisation of agricultural products)
The FNC is a ix public /private institution (membership-based)
4
Diaz Rios (2013a) presents the changing role of commodity authorities across many other coffee-producing countries, emphasising the strategic roles played by organizations such as the National Coffee Farmer Federation of Colombia (FNC) and ANACAFE in Guatemala.
23
and with representation of the government and the FNC) Guatemala Honduras India Kenya Peru Tanzania Vietnam
National Coffee Association (ANACAFE) National Coffee Council (CONACAFE) Coffee Board of India Coffee Board of Kenya National Coffee Council Tanzania Coffee Board Vietnam Coffee-Cocoa Association (VICOFA)
1963
Government Body
2001
Government Body
1942 1933 2002 Re-est in 2001 1990
Autonomous Government Body Autonomous Government Body Government Body Government Body Mixed Public-Private (but mostly private)
Source: Adapted from Diaz Rios (2014)
There are no coffee-specific development agencies under the Ministry of Agriculture, although the Directorate General of Estate Crops (Ditjen Perkebunan) has responsibility for farm-level coffee development and has implemented various farmer development projects over the years. Coffee is not a priority within the Ministry, which instead prioritises food crops (such as rice, soybean, sugar, corn and cattle) and other estates crops, such as oil palm, rubber and cocoa. At the district level, agricultural extension services are now generally embedded within an integrated agency – such as a BP4K (Badan Pelaksana Penyuluhan Pertanian, Perikanan dan Kehutanan) - instead of Ditjen Perkebunan. Much coffee-specific knowledge was lost as a result, and Indonesian coffee farmers are poorly served by government extension services. Also within the Ministry of Agriculture, the Directorate General for the Processing and Marketing of Agricultural Products (Ditjen Pengolahan dan Pemasaran Hasil Pertanian), assumes a role in supporting downstream coffee processing in Indonesia. In 2011, the Ministry established a Research Center for Industrial and Beverage Crops (BALITTRI) in West Java, with a mandate for coffee-related research, the capacity for which is still being developed. A key constraint across the Ministry is the lack of coffee-specific knowledge and expertise. The Association of Indonesian Coffee Exporters (AEKI) was formally established in 1979 to replace the Sindikat Eksportir Kopi Indonesia (SEKI), which was itself established in 1969 to administer the International Coffee Organization’s quota regime. AEKI is a private sector industry association, but worked closely with the Ministry of Trade to administer ICA quotas, and obtained access to a Ministry mandated export levy (which was effectively withdrawn by the government in 2011). AEKI’s activities have traditionally focused on policy advocacy, representation in the ICO, and international marketing, with little attempt to develop farmer support programs. An exception is a ten hectare Coffee Development Center located in Liwa, Lampung (Pusat Penyuluhan dan Pengembangan Kopi –P3K), which is now rarely used by researchers and extension agents alike. While AEKI still maintain offices in Jakarta and across Indonesia, its post-2011 financial viability has been severely diminished. Disaffected AEKI members in East Java established a rival industry association in Surabaya in 2011, known as GAEKI – Gabungan Eksportir Kopi Indonesia or the Indonesian Coffee Exporters Association (http://gaeki.or.id/en/). GAEKI appears to have obtained some degree of ministerial support, 24
particularly within the Ministry of Trade, and has represented the Indonesian coffee industry at some international events, including the ICO. Currently, neither organization is financially supported by a mandatory industry levy. The Indonesian Coffee and Cocoa Research Institute (ICCRI) is based in Jember, East Java, with a history that goes back to the Dutch colonial period. For the last 100 years, it has been the only credible coffee research institute in the country, housing more than 30 researchers and with land assets of 380 hectares. Organizationally, ICCRI has an uncertain and ambiguous position within the Indonesian bureaucracy. It is now structurally managed under PT. Riset Perkebunan Nusantara, a quasi-private organization whose role is to provide support for the large state-owned plantation sector (PTPNs). In practice, ICCRI has long been required to fund its own research activities through commercialisation, and has done this through various government contracts (e.g. providing processing machinery for farmers, or for the provision of seedlings for government programs), some consulting activities and project-based research funding from both domestic and international sources. While self-funding requirements have, at times, compromised the quality and integrity of its research programs, several excellent researchers with a high level of knowledge of the Indonesian coffee sector are based at ICCRI. In recent years, international donor agencies and coffee companies (e.g. recent announcements from Mondelez) have begun partnering with ICCRI as a key service provider to the coffee and cocoa sectors. Several other organizations also perform an important role within the sector. The Specialty Coffee Association of Indonesia (SCAI, http://www.sca-indo.org/) was established in 2007 under a USAID initiative to promote and improve the quality of Arabica coffee grown in Indonesia. SCAI has been responsible for a number of industry events within Indonesia, including product marketing, cupping and barista competitions, and for generally increasing the awareness of coffee quality within major Indonesian cities. SCAI maintains a very small secretariat in Jakarta. Coffee farmer organizations are extremely weak in Indonesia, and indeed this is mostly true right across the Indonesian agrarian landscape. Grass-roots farmer associations were severely curtailed during Suharto’s New Order regime (1966–1997), although various manifestations of an Indonesian Coffee Farmer Association (Asosiasi Petani Kopi Indonesia, APEKI, or sometimes APKI) have been established at different times, but with very little grass-roots support or capacity to organize nationally. The absence of credible farmer representation in Indonesia contrasts quite markedly with the situation in many Latin American countries, such as Colombia, and has meant that rural development programs are rarely held accountable by farmer lobby groups. The Post-Suharto emergence of mass peasant’s organizations, such as Serikat Petani Indonesia, has yet to significantly affect the coffee-growing communities. Producer cooperatives have, for the most part, been similarly ineffective in the coffee sector. Village cooperatives (KUDs) were frequently mobilized as political vehicles during the Suharto regime, and were heavily associated with corruption and political mis-use, and with state-backed monopolies in some crops (though generally not in coffee). Some farmers, therefore, remain 25
cautious of organizing under cooperative structures due to these associations. Successful cooperatives in the Indonesian coffee sector are generally those closely linked with large trading companies through sustainability programs, and some that are conduits for governmental assistance. Farmer groups (Kelompok Tani), generally consisting of 20-25 individuals, are widespread across the coffee regions of Indonesia, although their performance is highly variable. Many of these groups have been established by government agencies as a structure through which development programs can be channelled, and they frequently persist only so long as there is an active development program. Sometimes a charismatic or motivated leader is able to autonomously organize labor-sharing days or monthly meetings to discuss agronomic issues and problems. Any government extension program will deliver technical support through these groups, and private-sector sustainability programs will often rely on these groups as the foundation for organizing farmers. In summary, the overall institutional settings of the coffee value chain in Indonesia can be characterised as being extremely weak by international standards, and this severely complicates the effectiveness of support interventions. This apparently stems from several factors, including the relative lack of government attention given to the sector, which in turn reflects the reality that coffee contributes only 0.5% to total export earnings, and 1.3% to total agricultural output. In Indonesia’s increasingly industrialized economy, coffee is not generally considered to be a crop of national strategic economic importance. One consequence of this situation is the increasingly influential role played instead by private sector representatives of the international coffee industry in providing sectoral support in Indonesia, as these organizations have a greater stake in ensuring long-term supply of coffee than government agencies. 2.6. Export performance Comparisons between Indonesia and other coffee-producing countries show how exports from Indonesia have been stagnant, while other significant producing countries such as Brazil and Vietnam have increased their share of the world market (Diaz Rios, 2013b). In the case of Colombia, production declined during 2008-2012,due primarily to a severe attack of leaf rust and poor maintenance, but a nationally-coordinated effort that included a massive replanting program, managed to reverse that declining trend; coffee outcome in 2014 was even higher than pre-crisis levels. Throughout the 2000s, Vietnam consolidated itself as the second largest exporter of coffee, a position that was gained in the late 1990s. Based on ICO data, Vietnam’s export volume increased dramatically from 1.1 million bags in 1990 to 11.6 million bags in 2000, and continued to increase (albeit at lower rates of growth) to 14.2 million bags in 2010 and then up to 25.4 million bags in 2012. Brazil remains the leading exporting country. During the past two decades, exports have increased significantly, from 16.9 million bags in 1990 to 33.5 million bags in 2011 and, as far as Colombia is concerned, exports reached 16.6 million bags in 1992, a volume that has not repeated since then. 26
In comparison to Brazil and Vietnam, Indonesia’s export performance has been very modest. The average export output for the period 1990-2011 has been 5.5 million bags and relatively stable—the average export output was practically the same for the periods 1990-99 and 20002011, although ICO data suggests a spike in exports to 10.6 million bags in 2012. Export performance of the world top producers and exporters of coffee is further illustrated in Table 7 below which also gives an indication of the market positioning through the ratio of export value to volume. Based on ICO 2011 data, the average price in US$/Kg was 2.58 for Vietnam and 2.88 for Indonesia in 2011, while it was much higher for Brazil (4.35) and Colombia (6.24). Table 7. Export performance of main coffee exporters (2011 data) Unit Bags/60 Kg
Vietnam
Colombia
Brazil
Indonesia
17,675,000
7,733,365
33,456,218
6,158,795
1,060,500
464,002
2,007,373
369,528
2,741
2,897
8,733
1,064
Volume of coffee exports Tons Value of total coffee exports
US$ million
Export value/Volume
US$/Kg
2.58
6.24
4.35
2.88
Share of global coffee exports (volume)
Percent
16.98
7.43
32.13
5.92
Country average share of global coffee exports (Period 20002011)
Percent
15.58
10.61
29.48
5.98
Source: Diaz Rios (2013)
27
III. MAIN CHALLENGES FOR THE FUTURE DEVELOPMENT OF THE INDONESIAN COFFEE SECTOR This chapter presents the challenges and options for the possible future development of the Indonesian coffee sector. Based on the preceding assessment of the current structure and performance of the sector, this chapter tries to identify core challenges for the future development of the coffee industry in Indonesia. It is articulated around a vision and set of objectives by contrasting two scenarios:
a business-as-usual scenario, which essentially entails a prolongation of current trends with the private sector pursuing
market opportunities and improving value chain integration into global markets while not necessarily having the resources and mandate to tackle more structural issues such as lack of investment at farm level, weak collaborative partnerships across the industry, and weak institutions supporting the sector (such as crop monitoring and R&D).
a sustainable growth scenario that would aim at enabling the industry to realize its full potential in the medium to long term horizon.
Realizing the second scenario entails addressing the main critical issues that have been highlighted in the previous chapter and setting clear objectives in terms of increasing productivity, rejuvenating the production base, promoting environmentally friendly farming systems through agro-forestry and landscape approaches, differentiating products and adding value at all levels of the value chains, and establishing governance institutions and mechanisms. This section reviews the main challenges to be addressed, and examines the institutional and capacity requirements. 3.1. Main issues and challenges 3.1.1. Improving rural livelihoods and profitability of coffee farming Under current conditions of low productivity, ageing orchards and limited access to finance, coffee farmers in Indonesia have very limited capacity to invest in their plantation, contributing to a vicious circle of a low input/low output activity. Assuming annual output of 600 Kg per hectare, an average holding of one hectare, and farm-gate Robusta prices of Rp15,000/Kg in 2013, then each household might obtain a gross coffee-income of 9 million Rupiah per year (800 USD/year). This equates to a gross revenue (before costs) of around 2USD/day. This means that few coffee farm households are currently motivated to allocate scarce resources to coffeegrowing, and many fall below the poverty line. Smallholders are typically constrained by limited financial capacity to purchase inputs and pay for labor. Decisions are made on how best to utilise their limited resources based upon household food security and income requirements, with the objective of minimizing economic risks. Record-keeping of the use of labor and inputs, and even farm-gate sales is rarely undertaken, 28
such that the farm unit is not currently organized as a profit-maximizing business. The lower elevation Robusta areas offer more opportunity for substitution with other crops, such as oil palm, that are perceived to offer potentially higher net returns. Coffee cultivation is generally viewed unfavorably by farmers who have access to alternative income opportunities. Across the main coffee-belt in southern Sumatra, coffee is currently being replaced by rubber at lower altitudes and by vegetables at higher altitudes, and elsewhere by palm oil. In the Toraja region of Sulawesi, emigration is the preferred strategy for income generation at the expense of coffee farms, which are subsequently neglected (Neilson and Shonk, 2014). With nation-wide coffee production stagnant or increasing very slowly, the relative low level of investment reflects the rising importance of other exports, and helps explain the relative lack of government attention given to the crop. The disinterest in coffee can be contrasted with the increasing significance of palm oil exports over the last two decades. Under Indonesian conditions, coffee is a labor-intensive crop, and oil palm is capital-intensive, suggesting how national economic transformation appears to be re-shaping rural Indonesia. Irrespective of these broader changes, it seems likely that if farmers were to invest in pruning, fertilisers and pest and disease control, then yields could be increased to levels comparable with other major coffee producing countries. The increasing involvement of global coffee companies in origin countries, and their developing narrative of impending global coffee supply scarcity, suggests that private sector investment in production might be forthcoming. Under such a scenario, however, downstream actors within the global value chain would need to demonstrate a substantially heightened and sustained interest in origin activities than is currently occurring. 3.1.2. Increasing on-farm productivity The apparent overestimate of Indonesian coffee productivity in many official reports compared with primary field data has been mentioned earlier. Irrespective of precise measurements of yields and productivity, it is clear that smallholder coffee productivity levels in Indonesia are low by international standards The main causes of low productivity in Indonesia, albeit many and varied, and depending on the specific producing region, include: •
•
Natural climatic factors; heavy rainfall during the fruit setting season may be negatively affecting production in some regions such as in South Sulawesi, where climate change models are predicting increased rainfall in the future (Shroth et al., 2014). This may be a far greater limiting factor to productivity than is generally recognized. Pests and disease; coffee berry borer is affecting the volume, and the quality, of coffee produced in many regions and is commonly identified by farmers as their most damaging pest or disease concern. Producing regions that do not experience a clear dry season and tend to harvest throughout the year are most affected, 29
• • •
•
•
Limited use of fertilizers – both synthetic and organic – and inadequate attention towards maintaining soil fertility and conserving soil resources, Lack of pruning; coffee is capped and shaped in some regions of Indonesia, but is left to grow ‘wild’ in many other regions, Poor planting material and ageing stock; while some replanting occurs locally, coffee farmers do not generally have access to improved planting material and are unwilling, or financially unable, to temporarily forego coffee income to replace ageing stock, Shade-grown coffee; most coffee across Indonesia is grown under a relatively dense canopy of shade or as multi-strata coffee (North Sumatra is a stand-out exception, where sun coffee is common) which does not always facilitate high levels of coffee productivity. Many coffee systems are also strongly intercropped (with pepper and chili in Lampung for example), and so despite lower coffee yields, the overall system may be both quite productive and sustainable, Diversified livelihoods; many farmers choose to invest their financial resources and labor into alternative livelihoods including subsistence food production and off-farm employment, and so do not adequately maintain coffee orchards.
This suggests that there are considerable opportunities to increase farm income through on-farm productivity gains (process upgrading) either through the development of improved extension systems and possibly a large replanting program to encourage the rejuvenation of existing plantations. From a policy perspective, of course, the key question becomes what role the state should perform in supporting such a development. Rejuvenation of coffee plantations Most experts refer to the ageing plantations across Indonesia and the need for large-scale replanting. Use of Somatic Embryogensis (SE) propagation techniques has been proposed. While propagation through SE could be justified because of the scale of the replanting required, the technique was not very successful in the GERNAS experience for cocoa (partly because it was associated with a top-down distribution system). Large-scale, top-down, distribution of seedlings, whether SE or not, may be fraught with project management related problems and should probably be avoided. It has already been demonstrated in cocoa (which - like Robusta – requires slightly more demanding propagation techniques due to cross-pollination) that successful nurseries and budwood gardens can be effectively managed by small farmers themselves, and can provide a trusted, sustainable source of planting material for other farmers. Indeed, with minimal support, cocoa farmers have also been actively involved in the on-farm selection of superior clones themselves (McMahon et al., 2009). Propagation through local nurseries is also suggested by de Wolf (2013, p. 56) who argues that “although it was proven technically that SE is a promising technique, side-grafting combined with more gradual rejuvenation with top-grafted seedlings has proven to be more effective and manageable for cocoa.” There is no need to create an unhelpful sense of urgency that is probably not justified and the small-scale, bottom-up development of 30
farmer-owned nurseries is most likely to provide the most effective replanting model in Indonesia. Pest and disease control Despite some conflicting reports, it is clear that coffee berry borer is a major problem for both Arabica and Robusta coffee across Indonesia, and is particularly damaging for the quality of Arabica coffee. It is identified by the majority of farmers across different districts as the most severe pest or disease problem that they experience (Figure 9). Due to the large data gaps already discussed, it is difficult to determine with any certainty the extent of infestations or the total losses to the industry caused by the pest, but it is significant. The Coffee Berry Borer (CBB) has not received the same level of industry and donor attention as the Cocoa Pod Borer (CPB) has in the cocoa sector, and there have been few widespread campaigns or well-funded efforts at introducing IPM measures. Pheromone and Hypotan traps (including Broca) have been used, but their effectiveness at a larger scale is still uncertain. The capacity does not exist within the current government extension network to successfully undertake an awareness and training campaign on IPM in the coffee sector. In general, private sector extension programs probably have a greater likelihood of success than the costly option of revamping public sector extension. The Ministry of Trade might be better placed to play an important role by ensuring a supportive regulatory environment for the development of private sector extension. The idea (suggested by de Wolf, 2013) of allowing the costs of Internal Control Systems (for sustainability programs) and other forms of private sector extension to be offset as tax rebates is an interesting idea that might encourage private sector extension. Figure 9. Primary pest or disease problems reported by Arabica farmers in three Districts in Eastern Indonesia
Source: Neilson et al. (2013)
Good agricultural practices Given the historically limited role of the state in the Indonesian coffee sector, it is probably through innovative private sector involvement, and public-private partnerships that improved 31
agricultural techniques will be introduced to Indonesian coffee farmers. The PISAgro Partnership for Sustainable Agriculture, together with IDH’s Sustainable Coffee Partnership, offer a potential model for such collaboration and public-private partnership in extension provision. It is equally important to recognize that productivity improvements should be assessed more broadly than in a simple kilogram per hectare yield terms. Instead, productivity should considered in relation to broader livelihood strategies and the role coffee might perform within these, thereby taking into account labor demands and availability, and the importance of other forms of farm and non-farm income. Integrated agro-forestry may be more productive despite coffee yields being lower. Similarly, the productivity of the coffee-farming systems should be measured in terms of total resource demands and possible environmental degradation related to production, which might become a point of difference from Vietnamese production and ultimately more sustainable in the long term. Such livelihood-sensitive approaches to productivity improvements on coffee farms require high quality, locally-adaptive agronomic and social research. The current network of poorly-funded and Java-centric coffee-related research organizations, which perform well in some technical regards, is inadequately situated to meet this demand. Consideration should be given towards more effective coordination of existing research initiatives in the coffee sector across Indonesia. 3.1.3. Improving land use management and adapting to climate change A rapid expansion of smallholder coffee cultivation in southern Sumatra took place in the 1950s and 1960s, driven by both state-sponsored transmigration schemes and spontaneous migration from Java and from elsewhere within Sumatra. The main coffee belt in southern Sumatra is found on the eastern side of the Bukit Barisan Mountain Range. In this region, and elsewhere, coffee was commonly planted on previously forested lands or integrated into pre-existing systems of swidden or migratory cultivation. It is extremely rare for coffee farmers to hold certificates of land ownership, and the formalization of state forestry lands in the 1970s has resulted in numerous land conflicts between coffee farmers and state forestry departments. Expansion of coffee growing into Protection Forest (Hutan Lindung) and even into some National Parks (WWF, 2007) still occurs across Indonesia, exacerbating land conflicts and social tensions (Arifin et al., 2008). Notwithstanding some sound reasons to address deforestation within sites of coffee production, the environmental impacts of land-use transformation are rarely straightforward. For example, Verbist et al. (2005) have argued that while forest clearing and the subsequent establishment of coffee agro-forests in Indonesia represented a significant landscape transformation, it has also had positive hydrological effects for downstream water users (previously a widely-cited reason for evicting farmers from within the catchment). Coffee has also been responsible for ‘reforestation’ under agroforestry. In some instances, such as in the Sumber Jaya district of Lampung, farmer groups have negotiated community forestry agreements (Hutan Kemasyarkatan) with the government within Protection Forest areas on the condition that hydrological functions are maintained through adequate shade cover. Since around 2000, the forest estate on Java, managed by the state agency 32
PERHUTANI, has also been open to community forestry agreements that allow farmers to cultivate Arabica coffee beneath a canopy of timber trees. The community can harvest the coffee, but cannot clear the trees. These schemes have been a key factor behind the recent increase of coffee production in West Java, producing so-called Preanger coffee. Proponents of these agreements argue that coffee-based agroforestry, under secure tenure, provides incentives to farmers to maintain a permanent land-cover that provides landscape and hydrological benefits that are equivalent to many forests and certainly superior to degraded forest lands. More support, however, is required to ensure that such agreements provide benefit both in terms of livelihood improvements and environmental outcomes. Consideration should also be given to climate change risks and climate smart initiatives for coffee production in Indonesia. A recent study on the predicted effects of climate change on suitable areas for Arabica production within Indonesia (Shroth et al., 2014) found that the total area of climatically suitable land would be greatly reduced by 2050, as increased temperatures would shift upwards the suitable altitude belt for Arabica coffee production. While the study found that overall production levels could be potentially maintained across Indonesia, this would require significant migration and the introduction of coffee into new areas not currently under cultivation in a process that would need to be properly managed to prevent ecological degradation. In particular, the climate change model identified considerable climatically suitable land on the island of Sulawesi. Some studies are being carried out regarding the impact of climate change on recent infestation of coffee berry borer. Such studies should provide recommendations on farming practices that can create an “unfavourable micro-climate for berry borer” (such as less shading or heavy pruning), other types of climate smart practices, and the potential shift in growing areas to those unfavourable for berry borer. It is important to recognize both the environmental impact of coffee plantations at some forest frontiers in Indonesia, as well as its potential role in landscape improvement under supportive institutional regimes (such as community forestry). In order for such initiatives to take place at scale, coffee-based agro-forestry systems should perform an important function in well-designed programs to improve development on marginal or degraded forest lands. There may be some exciting opportunities for supporting innovative community-based forestry agreements across Indonesia if suitable land can be identified. 3.1.4. Mainstreaming sustainability programs Sustainability programs include a broad range of certification and verification programs such as Fairtrade and organic, Rainforest Alliance, Utz Certified, industry-wide initiatives like 4C (Common Code for the Coffee Community), and company specific programs like Starbucks CAFE Practices, the Nescafe Plan. and the ‘Coffee Made Happy’ program from Mondelez. Notwithstanding the somewhat different objectives and modes of operation of these schemes, they are all referred to as sustainability programs, and align with what Giovanucci (2013) refers to as Voluntary Sustainability Standards (VSS). It is difficult to get an accurate estimate of the scope of sustainability programs in Indonesia. The International Coffee Organization (2013) has begun requesting data on exports of organic and 33
‘differentiated’ coffee from member countries. Based on ICO certificates of Origin in 2012, Indonesia reported exporting 8,465 tons of organic coffee, and 15,458 tons of ‘differentiated’ coffee. Wahyudi and Jati (2012) found that 46 Indonesian coffee companies were certified in 2011 with total certified coffee of 47,000 tons per year. Assuming that the total number of coffeefarming households across Indonesia is 1.8 million (Wahyudi and Jati, 2012), then the total share of households currently involved in such programs would be only around 5% of the total. This suggests that only a very small proportion of total farmers are currently exposed to such programs and thus strong potential exists for future expansion. The North Sumatra and Acehnese Arabica industries are the primary focus of certification programs, with nearly two-thirds of all Indonesian coffee programs certified as either Utz or Rainforest Alliance coming from this region (Table 9). In addition, Starbucks is a major buyer of Indonesian Arabica, and the influence of their in-house ethical sourcing program - Coffee and Farmer Equity (C.A.F.E.) Practices – is substantial in the Arabica regions. This is despite the fact that Medan is responsible for less than 20 percent of all coffee exports. In contrast, only 12% of certified coffee programs are found in the important producing region of southern Sumatra. Table 8. Location of major certification programs in the Indonesian coffee sector (January 2014) Region
Utz Certified
Rainforest Alliance
‘Producer’
‘Trader’
‘Producer’
‘Trader’
Northern Sumatra
7
8
27
25
Southern Sumatra
1
3
5
4
Java
2
3
3
8
Sulawesi
1
1
2
Flores Bali
3 1
1
Papua Total
1 12
14
41
39
Source: www.utzcertified.org and www.rainforest-alliance.org
The greater interest in certifying higher quality Arabica coffee compared to Robusta is due to the greater willingness of specialty buyers to pay a premium for certified coffee, but may also be due to the greater dominance of both emerging markets and the domestic Indonesian market for the Robusta-growing regions of southern Sumatra. The exception to this Arabica bias is the Common Code for the Coffee Community (4C), which currently lists fourteen 4C-compliant units in Indonesia, thirteen of which are based in southern Sumatra (www.4c-coffeeassociation.org). While foreign-owned trading companies tend to be more active than Indonesian-owned exporters in implementing certification programs across 34
Indonesia, the former are particularly dominant within the 4C units, where they are responsible for ten of the fourteen units. The 4C mark is not generally used on branded products. It is considered to be easier and less expensive to obtain than Rainforest Alliance or Utz, and so appears to more appealing in the Robusta sector, where opportunities for quality-based quality differentiation are more limited. Only seven of the 41 listed ‘producers’ of Rainforest Alliance coffee, and only one of the twelve listed ‘producers’ of Utz certified coffee in Indonesia can be identified as farmer organizations. With the exception of two Utz Certified plantation estates, the remaining certified producers are all exporting firms. Even many of those producers identified as ‘farmer cooperatives’ on these databases are actually directly supported by, and even established by, exporting firms. This reflects the common mode of operation for almost all sustainability programs in Indonesia, which are initiated and strongly driven by the exporting firms and buyers rather than being driven by producer organizations. It is the exporters who own the certification. This phenomenon has encouraged a shift in local value chain structures, whereby exporters are forced to engage more directly with farmers and frequently develop up-country buying stations. At least initially, exporters are required to offer price incentives to farmers in return for their participation in the schemes. Otherwise, farmers frequently report little direct benefit from their participation in sustainability programs. This exporter-driven model is also reported by Wahyudi and Jati (2012), who further claim that Indonesian coffee businesses implement certification simply to satisfy buyer demands without specifically ensuring that benefits of participation are being directed towards farmers. International roasting firms (Starbucks, Nestle, JM Smuckers, Mondelez) are also showing enhanced interest in sustainability programs at origin, thereby placing further pressure on exporters to develop tighter supply chains with farmers. 3.1.5. Supporting downstream industrialization Downstream industrialization (roasting) constitutes a form of functional upgrading along the value chain, and is considered to be a highly strategic economic objective for the Government of Indonesia. Downstream value-adding of natural resources is a key theme within the Government’s 2011 Masterplan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI), which has been endorsed by the new President Joko Widodo. Unlike cocoa, rubber, palm oil, timber products, and livestock, however, coffee is not specifically identified as a ‘main economic activity’ within the Masterplan. The Government of Indonesia, through the Ministry of Industry, has identified the development of a ‘Coffee Processing Industry Cluster’ as strategically important to national development objectives (Ministerial Regulation No. 115/M-IND/PER/10/2009), and the Ditjen PPHP (2011) within the Ministry of Agriculture has identified ‘Rural Industrialization’ through local processing units as an important tool for value-adding in the coffee sector. There have been few policy interventions to date to restrict trade in both unprocessed and processed coffee products in Indonesia, and relatively few FDI restrictions in the sector. As a result, Indonesia has become integrated within regional production networks and is acquiring new skills and technologies through the active involvement of lead firms. Industrial policy 35
initiatives, introduced through the Ministry of Trade, such as export taxes and bans, have been imposed on other raw materials such as cocoa beans, rattan and mineral ores in recent years. In line with these broader strategic objectives, it is possible that the government may consider restrictive trade measures in the future to stimulate the development of the domestic coffee processing sector. An export tax on raw cocoa beans was established in Indonesia in 2010 to facilitate downstream processing. This tax encouraged new investment in grinding operations and has increased the volumes of value-added cocoa products with surprisingly little negative impact on prices at the farm-gate level (Neilson et al., 2013b). The dynamics along the coffee value chain, however, are different to cocoa. In the near future, the domestic roasting of specialty coffees for export is unlikely due to the strict, and highly sensitive, quality requirements and the challenges of establishing a brand reputation in this subsector. It is therefore unlikely to result in supply chain restructuring in the Arabica sector, and any tax on green bean exports would most likely be borne directly by Arabica farmers. The Robusta subsector associated with the processing of soluble coffees is similarly already growing without the need for protective industrial policy that would risk negatively affecting farm-gate prices. The processing (grinding) of cocoa beans is already highly consolidated globally, and constitutes an intermediate non-branded step before final chocolate manufacturing. In contrast, there is no such intermediate stage in coffee processing. Roasting or instant coffee manufacturing is both the first industrial stage in the value chain node, and the stage where branding occurs. This is likely to present greater challenges for Indonesian-based firms compared with cocoa grinders. It should be noted that there has not been any public lobbying for such an export tax on coffee beans in Indonesia, and any notion of industry protection was unanimously rejected by attendees at a February 2014 coffee stakeholder roundtable. There has been less success in terms of value-adding through further processing at the farmlevel. Industrial upgrading is almost inevitably undertaken away from the coffee-producing rural areas. Indeed, there are few locational advantages to processing even in the major cities near to production centers, and processing will most likely continue to take place in the industrial centers of Java where external economies in suppliers, labor, and technologies are advantageous. The Ditjen of Marketing and Processing of Agricultural Products (eg. Ditjen PPHP, 2010) presents an argument for rural poverty alleviation through downstream value-adding at the farmlevel. This is most frequently manifested through support for Local Processing Units (Unit Pengolahan Hasil or UPHs) within coffee-growing communities. Under this model, farmer organizations are provided with processing equipment (for example, pulpers and hullers) to produce green beans at the farm-level instead of selling parchment coffee or cherries to centralized mills as is otherwise common in the Indonesian Arabica industry. In most cases, these units struggle to successfully compete with centralized mills in terms of both efficiency and quality control. Another approach is for farmer organizations to further engage with coffee roasting as a cottage industry and market their product locally, which can be a useful means for farmers to utilize their poorer quality coffee or discards, but is unlikely to help 36
penetrate major urban and export markets in the foreseeable future due to the challenges of maintaining quality. The processing of high quality coffee as roasted beans, or as soluble coffee, is not feasible at the farm-level due to both technological and capital constraints. While it could be argued that the UPHs provide local off-farm employment, there are considerable costs associated with establishing UPHs that appear unlikely to be offset by the number of jobs created. At the farm-level (at least for Arabica producers), value-adding seems more feasibly and profitably conducted through product differentiation and quality improvement rather than downstream processing. 3.1.6. Adding value through quality differentiation and promotion of origin Product upgrading—i.e. quality enhancement and differentiation of green coffee beans—is another potential means of value addition. Some efforts along these lines have occurred in Indonesia, although this has involved only a small proportion of production. Giovanucci (2013) presents it as a pathway forward for the Indonesian coffee sector, starting from the following assumption: “Commodities are notorious for their fungible nature and price sensitivity. So, to add any very substantial value essentially means to escape from the commodity trap into areas of differentiation that the market values.” In addition to improvements in taste and physical bean characteristics, quality enhancement can also take place through narratives around quality construction, including through certification, Geographical Indications (GI) and through roaster origin stories. The ability of certified production to enable quality differentiation has already been discussed above, and the following discussion concentrates more specifically on inherent quality improvements within the specialty coffee market. Growth in the specialty coffee market has provided new opportunities for coffee smallholders in Indonesia to participate in these relatively high-priced markets. A comparison of export prices between Indonesian Robusta (which is generally low quality even for a Robusta coffee) and Indonesian Arabica (which has a good international reputation) is suggestive of the capacity of quality improvements to add value. During 2011, average export prices to the United States for Arabica coffee from Medan were $6.6/kg, compared to only $1.93/kg for Robusta coffee from Lampung (BPS, 2013). Moreover, these values even compare favorably to the value of processed soluble coffee, averaging only $3.5/kg (according to UNCOMTRADE data). This is an important point, as ‘value-adding’ may involve quality improvement rather than downstream processing. Indonesian Robusta producers (particularly those in southern Sumatra) have, for the most part, been excluded from international specialty markets, despite the potential suggested by some of the reports in Appendix A. De Wolf (2013, p. 37) claims that 50,000 tons of Robusta is currently sold as specialty coffee, although this appears to be globally rather than Indonesian Robusta. There are some good quality Robusta coffees currently produced on Java, Bali and Nusa Tenggara, which could potentially be developed into specialty Robusta, although the global market for this product remains limited.
37
While quality improvements can clearly add value to green beans, the demands of specialty coffee buyers can also be arduous and challenging for smallholders, with specialty buyers and consumers demanding increasingly detailed information regarding the conditions of production and often assuming an advanced level of organizational capacity within supply chains to comply with these demands. As emphasized by de Wolf (2013), strong private sector interest and the involvement of international buyers have been influential parts of the Arabica upgrading story in Indonesia. This increasing upstream involvement of international coffee companies in Indonesia presents both opportunities and challenges to Indonesian smallholders. Over the last decade, specialty coffee roasters, both large and small-scale, have begun developing ‘directtrade’ relationships with coffee producers at origin alongside, or instead of, third party certification. There are many attractions for roasters to do this: to assert greater influence over quality control procedures at origin; to ensure long-term supply; to derive an advantage in a competitive market by projecting superior origin knowledge and social responsibility to consumers; and to save costs by ‘cutting out the broker’. These trends have been widely debated in the industry, but they are commonly believed to offer new economic opportunities for coffee growers in producing countries. While the extent to which such relationships result in a better quality of life for many Indonesian coffee farmers can be debated (Neilson and Hartatri, 2014), it is clear that many farmers have benefitted from a more certain market, higher prices, and sometimes access to technologies, knowledge and finance. Through an understanding and appreciation of the benefits offered to farmers resulting from their insertion within specialty coffee chains, the government might consider supporting the positive role performed by buyers, domestic and international in this regard. ICCRI, through its MOTRAMED model, and some international donors are applying such an approach to selected farmer groups. A policy strategy where the Government supports private sector developments, and uses the potential learning and skills development opportunities from within the value chain, should be considered. The Indonesian domestic markets for coffee are considerable and are already segmented into various quality and character differentiations. There is a broad range of offerings from organic Gayo to Italian espresso and from 3-in-one to pricey Kopi Luwak. These are a great base to build on because they stimulate consumer interest and opportunity for many layers of value that can be shared across the supply chain. There has not, to date, been a concerted or targeted marketing campaign to promote Indonesian specialty coffee and, unlike ‘Colombia coffee’, Indonesian coffees are not associated with an ‘Indonesian Coffee’ brand. The exception here is the efforts of the Specialty Coffee Association of Indonesian (SCAI), which have been commendable, if somewhat limited. Instead, brand recognition for specialty coffees exist at the local or regional level (Mandheling, Gayo, Toraja, etc.) as a result of quality characteristics that have emerged due to local geographical conditions and processing responses to these conditions (e.g. wet-hulled coffees in Sumatra and Sulawesi). AEKI has registered the names of several Indonesian districts as trademarks, but this has not been supported by active marketing or brand development initiatives. Through activities such as specialty auctions, cupping competitions and origin visits, SCAI has been moderately more 38
successful in the establishment and promotion of regional identities. For the most part, however, regional identities have emerged through entirely private sector and corporate initiatives and several private trademarks for Indonesian coffees have now been registered. Geographical Indications (GIs) Geographical Indications (GIs) are the notable and sometimes unique characteristics that are essentially attributable to the natural or human factors of a specific origin. Protected by the government, they can be used as a powerful form of market differentiation, provide a means of recognizing and valuing local cultural identity, and can even foster ecological conservation. As underscored by Giovanucci (2013), GIs offer multiple opportunities for considerable and lasting added-value and may be one of the best investment areas for both the government and the respective regions that take advantage of this tool. The Indonesian Government has also indicated a strong interest in GIs as a rural development tool in Indonesia. Of the 29 registered GIs in the country (www.dgip.go.id/indikasi-geografis, accessed January 14, 2015), eight are for coffee products as follows: 1. 2. 3. 4. 5. 6. 7. 8.
Kopi Arabika Kintamani Bali (registered in December 2008) Kopi Arabika Gayo (April 2010) Kopi Arabika Flores Bajawa (March 2012) Kopi Arabika Kalosi Enrekang (February 2013) Kopi Arabika Java Preanger (September 2013) Kopi Arabika Java Ijen-Raung (September 2013) Kopi Arabika Toraja (October 2013) Kopi Robusta Lampung (May 2014)
With the possible exception of the Kintamani Bali GI, however, there has generally been insufficient institutional capacity-building associated with the GI that might generate economic benefits for farmers. Elsewhere in the world, GIs have been associated with employment creation, price increases, and protection of cultural property (Giovannucci et al., 2009), although GIs can be difficult and costly to establish and enforce. There have been no attempts, to date, to assess the effectiveness or developmental impact of existing GIs in the Indonesian coffee industry. It is unclear whether the benefits reported elsewhere (e.g. Giovannucci, 2013) are being achieved in Indonesia, and previous papers (Neilson, 2007) have argued that limited institutional capacity is likely to dramatically curtail the cost effectiveness of GIs in Indonesia. The local ownership of GIs, and their links with the protection of cultural heritage, is inherently appealing to policy-makers within the national government. At the local level, moreover, local elites across Indonesia appear eager to use GIs as a means to generate rents through the control of trade. There is little evidence from the more established GIs in Indonesia that the marks have been able to gain market acceptance or recognition as a quality signifier in the specialty markets. More research is required into this particular aspect of market recognition, but very few (if any) specialty roasters promoting these coffees make reference to the GIs. GIs should presumably be 39
considered part of a much longer-term investment in regional marketing, and their underuse may suggest free-riding from the reputation created by the GI. Even so, it would reflect an inability to effectively monitor and enforce the GI in the market. Instead, the trend seems to be towards more tightly integrated supply chains where large buyers (including exporters, international traders and specialty roasters) are able to create place-based brands for particular origins. These are sometimes even formally registered as trademarks. The quality of the coffee traded under these brands is assured through ‘direct trade’ relationships and by standard industry conventions such as coffee cupping to assess quality. To be effective as a reliable signifier of quality in the market, the institutions involved in managing the GI need to have the capacity to replicate these buyer-driven quality control processes and the willingness to enforce them. Due to the historical development of the coffee sector in Indonesia, with very little state involvement, the government cannot depend on an in-house reservoir of capacity and resources to assist with such management. In the Indonesian context, at best, it seems that Geographical Indications should be considered as a potential tool for supporting the long-term development of place-based market identities in the sector. While there have to date been few tangible short-term economic benefits to farmers, the process of establishing a GI in a particular origin may help to catalyze other institutional developments and to increase general awareness of place-based quality associations that are prevalent in the specialty coffee. 3.2. Institutional and capacity requirements 3.2.1. Promoting industry partnerships and coordination Diaz Rios (2013a) provides an international overview of the evolving role of commodity authorities in the coffee, cocoa and tea sectors, suggesting that commodity authorities appear to be experiencing something of a revival globally in response to needs to support and facilitate commodity specific development. While such authorities are institutionally embedded in various ways, most appear to be embracing an increased role for the private sector. Diaz Rios (2013b) also emphasized the role of successful industry organization in marketing initiatives, stating that “strong organizations are behind successful promotional efforts” and that “a leading/coordinating organization is a precondition for promotional efforts to succeed”. In contrast, the previous section highlighted the relative weak nature of existing coffee-related institutions in Indonesia and the lack of national-scale coordination. Even during the ICO era of regulated trade (1962-1989), there was never a national-level coffee authority in Indonesia. Therefore, an initiative to systematically support the development of effective coffee institutions in Indonesia would appear to offer some promise. It is important, however, to better understand the relative ineffectiveness of past and existing institutions. An underlying cause of the poor performance of AEKI, as probably the foremost industry association in Indonesia, appears to have been a combination of: (i) its lack of accountability to industry actors (farmers, exporters or manufacturers); and (ii) poor financial transparency (it seems that annual reports were never made publically available). Intimately linked to the 40
challenge of poor accountability is the ongoing inability of Indonesian coffee farmers themselves to coherently present their concerns and aspirations in public policy debates due to the absence of coordinated farmer representation (either locally or nationally). Any attempt to establish some form of industry fund (a Special Purpose Fund, or SPF) for coffee industry development in Indonesia, as suggested by Diaz Rios (2013a), would presumably face similar challenges to AEKI (which, it should be remembered was financially supported by a special export levy). As suggested by Diaz Rios (2013a), an “underlying assumption with SPFs is that users are contributing to the fund under the expectations that services will be provided”. “Democratization of, and transparency within, CA (Commodity Authority) decision-making processes are important to maintain integrity.” In Indonesia, this would remain an immense challenge. A precondition for an effective organizational presence is the development of systems of accountability, including the capacity of farmers to represent their own interests in policy debates. Diaz Rios (2013a) also discusses the emergence of public-private co-shared institutions (such as in Cameroon) as an alternative model, and it would appear that such an institution may have a greater potential in Indonesia. There has already been some precedence in Indonesia with the Cocoa Sustainability Partnership (CSP), as reported by de Wolf (2013), who suggests that a Robusta-focused partnership has some potential. Interestingly, the CSP evolved in the cocoa sector with the support of the IFC, which was simultaneously attempting (without much success) to support accountability systems within the pre-existing national-level cocoa association (ASKINDO). Throughout 2014, a public-private partnership initiative has been further developed by IDH through the Sustainable Coffee Program and in partnership with the PisAgro coffee working group. These initiatives are developing a public-private partnership in southern Sumatra that will establish an integrated public-private extension program. Initiatives such as these, however, tend to gain the support of international trading companies and manufacturers who are increasingly active within Indonesia, but gain less traction with government authorities and associations (such as AEKI or GAEKI) that primarily represent the interests of national industry representatives. The considerable private sector attention (including allocation of resources and knowledge) currently afforded to the Indonesian coffee sector provides an opportunity that could be more effectively harnessed by the Government of Indonesia to support long-term sectoral development though an innovative partnership model. 3.2.2. Improving data collection systems Several of the technical reports refer to the limitations of data associated with the Indonesian coffee sector. For example, De Wolf (2013) states that he found “no evidence that Government, through its various departments, is adequately informed of activities and progress in key areas”. He points at major information gaps on the condition of plantations, species/varieties, age composition, farming practices, and productivity. Furthermore, “several of the respondents indicated that the quality of available statistics is not adequate for planning and targeting purposes.” This claim should be taken seriously because "you cannot manage what you cannot measure." 41
Despite this, it is still common for reports and publications to use data on Indonesian coffee production – commonly that published by the Directorate General of Estate Crops (Ditjen Perkebunan) – as the best available information on current conditions and trends. There is no national coffee census in Indonesia, and no organization or agency is specifically tasked with collecting data on coffee production, productivity, pest and disease prevalence, and prices. ‘Official’ Ditjen Perkebunan data is not collected using methodologies and approaches standardized across districts and provinces. As a result, this data is not only inaccurate, but may also be misleading. Relying on such data to underpin program and policy decisions can therefore lead to poor decision-making. Several factors could lead to concerns about the official data. For example, Ditjen Perkebunan (2013) presents the improbable suggestion that production increased by exactly 2.9% across 29 of Indonesia’s 33 provinces in 2012: this strongly suggests aspirational data entry rather than any form of primary data collection. Similarly, despite observed production fluctuations due to weather, the Ditjen production data presented in Figure 10 suggests little year-on-year variation compared to other data. Figure 10. Estimates of coffee production and exports (tons) from different sources
Source: J. Neilson, 2014
Several important implications result from the poor quality of production data, including that several industry trends are suggested that appear to be misleading. In particular, probable data inaccuracies frequently repeated in the technical reports and elsewhere include:
A national level shift away from Robusta towards Arabica cultivation is widely reported, but appears to be less significant in reality. Government has sometimes called for a shift towards Arabica to increase the total value of the crop and has promoted some programs 42
to this end. This shift appears to be exaggerated and reflects wishful thinking among project managers. It should be remembered that Arabica and Robusta inhabit different agro-ecological niches, and they are generally not substitutable crops, so a shift from one to other at the farm-level is not realistic. It is possible that production in Robusta areas could have declined, while production in Arabica areas increased independently, although there is little reliable evidence that this is occurring on a large-scale across Indonesia.
The productivity (kg/ha) for Arabica is sometimes reported as being higher than Robusta, whereas field observations would suggest that this is rarely the case. The average productivity of Arabica is sometimes reported as being as high as 800kg/ha, when field observations and interviews suggest it is in fact much lower than this. In South Sulawesi, recorded Arabica output based on farmer interviews for established coffee farms is even lower at less than 200 kg per hectare (Neilson et al, 2013). Productivity in Aceh and North Sumatra is probably higher than in other Arabica regions, but is unlikely to be above 500kg/ha on average.
There is a consistent overestimate of total coffee production on the island of Sulawesi. Some reports suggest up to 20,000 tons of Arabica and 40,000 tons of Robusta (eg. GDS, 2007), when field observations triangulated with trade data suggest a more realistic estimate of 4,000 and 10,000 tons respectively.
Aggregate data, based on official estimates, suggests that the average size of coffee holdings across Indonesia is around 0.6 hectares, whereas primary survey data across Sumatra, Sulawesi and Flores suggests a slightly larger average of just over one hectare. This could be due to the national data including those farmers for whom coffee is not the primary crop, whereas field data is commonly taken in primarily coffee-producing subdistricts. If so, it probably indicates that the total number of households for whom coffee is the primary source of income is much less than official data suggests (i.e. 2 million households).
Export data, combined with data obtained from trading houses and processors provide a further source of data triangulation that could be more effectively utilized. The volume of recorded coffee exports varies considerably each year in accordance with fluctuations observed in the field related to weather events and is more closely related to ICO crop estimates shown in Figure 10. What is the solution to this severe data problem? Given the critical role of information in guiding public and private investments, Diaz Rios (2013b) suggests that there may be a case for public investment in a reliable and modern information system to monitor production and market developments. This investment should be given serious consideration, although the costs of undertaking such an investment should not be underestimated for a production base that may constitute up to two million households, many of whom live in relatively remote regions with poor accessibility. While more accurate data on coffee production is sorely needed, similar deficiencies also exist with respect to various other agricultural commodities and a case would 43
have to be made why significant investment in coffee should be prioritized over alternative commodities. A starting point, however, might be better coordination with the decennial national Agricultural Census (most recently conducted in 2013). A detailed and concerted analysis of this census data with respect to coffee production could provide a relatively accurate assessment of the current state of coffee production in terms of production geography and how coffee is inserted within livelihoods. It would not, however, provide an accurate assessment of the agronomic state of plantations, which would require a specific survey. 3.2.3. Enhancing certification schemes and sustainability systems Indonesia has the capacity and the potential to create and manage powerful forms of differentiation that can translate to substantial market advantages. These advantages are not just in income but also in reputation and local “brand” value. This section refers to the developmental potential of sustainability programs. Giovannucci (2013, p. 9) argues that “judicious public sector investment can leverage VSS to also serve various public benefits such as enhanced stewardship, strengthened producer organizations, improved competitiveness and better prices.” This approach certainly has merits in Indonesia, although it is unlikely to take the form of direct state support for private sector partners, but could rather focus on commodity platforms or industry-wide partnerships (as argued by de Wolf, 2013). Optimism regarding sustainability programs is not unanimously shared amongst Indonesia-based actors. Wahyudi and Jati (2012) have argued that coffee smallholders are poorly informed regarding their own involvement in sustainability programs and the multitude of schemes has caused confusion at the farm level. They also reported on a seminar coordinated by the ASEAN National Focal Point Working Group on Coffee in June 2012, where it was questioned whether producers received any benefits at all from participation in certification programs, suggesting that they instead may be bearing the costs. Indonesian-owned exporting firms - many of whom are already struggling to compete with foreign traders and their access to low-credit finance perceive certification schemes to be a non-tariff barrier to exports. Some local exporters even view certification as a kind of ‘quota’ system that allows preferential market access to foreign traders. The penetration of foreign traders into growing regions and the establishment of directbuying relationships with farmers are frequently presented – according to this narrative - as neocolonial exploitation of poor farmers. Foreign standards are thought to impose an entry barrier for Indonesian coffee being sold into key destination markets. The domination of foreign NGOs and standard-setting organizations is a further concern and has fuelled calls for the establishment of a national standard within Indonesia, which the government appears to be seriously considering. Indeed, there is some precedent in Indonesia for doing so in other commodities (Teh Lestari and Indonesian Sustainable Palm Oil). A workshop held in Jakarta, hosted by the Ministry of Agriculture in September 2012, agreed to draft an Indonesian national standard and certification system for sustainable coffee in Indonesia. The underlying political motivations for establishing such a mark, however, may not necessarily reflect a consideration of farmer interests or a solid understanding of the dynamics, motivations and implications of standards. A new national mark is unlikely to result in direct benefits to producers 44
and it would face international market credibility challenges. A more constructive approach is that pursued in in the Indonesian cocoa sector in recent years, where a National Reference Group developed ‘National Indicators for Sustainable Cocoa Certification’ in 2010. These were designed in partnership – rather than competition - with existing programs such as Utz Certified and Rainforest Alliance. The current model of exporter-led certification and sustainability programs is also widely debated within Indonesia. Sendall (2013) suggests that certification should be owned by producer organizations, rather than by exporters. While not an uncommon argument, it may be counterproductive given the current institutional settings of the Indonesian value chain, especially if the benefits of certification result from enhanced provision of services by the exporter rather than being inherent to certification itself. Certification appears to be increasingly incorporated within, or possibly being replaced by broader corporate CSR initiatives that emphasize direct engagement with, and technical assistance for, primary growers. This suggests a sharper orientation towards service delivery rather than auditing compliance, and so may be more adaptable to meet local requirements than more rigid certification schemes. The greatest benefits for participating farmers may be related to the emergence of direct buying arrangements, resulting in higher prices and greater price transparency, the strengthening of farmer organizations, the facilitation of credit arrangements, and the potential transfer of skills and technology to farmers. These benefits could be delivered with, or without, certification as part of broader corporate sustainability programs. De Wolf (2013, p.62) argues that the “tendency to exclude and bypass local networks of collectors and traders ……. is a serious flaw”, and it is clear that local collectors do frequently deliver important services to farmers, as emphasised earlier in this report. However, when executed effectively and with due consideration to the farmer services provided through local networks, more direct linkages between farmers and larger, well-resourced agri-business companies do appear to facilitate enhanced transfers of knowledge and skills that are otherwise difficult to achieve in Indonesia. This is particularly beneficial in an institutional environment where state provision of public goods, such as extension, is largely dysfunctional. Arguments that local traders will suffer a loss of livelihood from direct linkages similarly seem difficult to sustain from a poverty alleviation perspective, if we assume that they can most likely reallocate their capital elsewhere. There are concerns over the emergence of local monopolies linked to sustainability programs. Once exporters make fixed costs investments in buying stations and field staff, they are inclined to protect their investment through exclusive supply arrangements. Although there is some evidence of farmer groups switching allegiances between different company programs, at this stage, exporters tend to avoid encroaching on the territories of other buyers. This geographical exclusivity means that farmers may not always have the option of selecting the company programs that offer them the best services. These are serious concerns that will ultimately need to be addressed assuming that current trends in sustainability continue. However, they need to be considered against the existing capacity of farmer organizations in the Indonesian coffee sector to replace the service delivery functions of large buyers. At this stage, integration within 45
the supply chain of a major buyer provides opportunities for farmer capacity-building that could then be developed over time into the capacity to effectively manage certification programs. Given the uncertainty over the benefits of sustainability programs, and the prevailing scepticism within Indonesia, the appropriate response of the Government of Indonesia and local industry actors remains unclear. Diaz Rios (2013b) argues that “the major contribution of the government in this area can be in terms of providing an enabling environment for environmental and social compliance” through such activities as research, monitoring of pesticides usage, and soil and land use mapping. While there have been some reports that local authorities have felt sidelined by sustainability programs, in general local authorities tend to be appreciative when these programs provide support towards agricultural extension activities. It appears that a more sophisticated appreciation of both the opportunities and threats presented by sustainability programs in Indonesia, and the processes through which benefits and impacts occur, is required to identify an appropriate government response. Rejecting international standards and resisting the farm-level involvement of global coffee actors, however, is unlikely to be in the best interests of Indonesian coffee farmers. 3.2.4. Strengthening producer organizations The undeveloped state of producer organizations across the Indonesian coffee sector suggests the potential benefits of support interventions to such organizations. Sendall (2013) claims that to improve market access and product differentiation through sustainable certification, “the organization of smallholders into producer organizations is a pre-requisite.” Similar sentiments are widely expressed and so are worth examining. There are, however, essentially three relatively distinct organizational forms through which Indonesian farmers could be mobilized: (i) cooperatives; (ii) farmer groups; and (iii) peasant organizations (as presented earlier in Section 2.5). Cooperatives involve the legal establishment of an entity that can then engage in business activities, and must comply with formal organizational protocols (regular meetings, leadership roles, book-keeping, membership fees, etc.). There has been a long history of support for cooperatives through the Indonesian Ministry of Cooperatives as a principal vehicle for indigenous economic empowerment. The cooperative structure, however, does not have a very good reputation in Indonesia, and is often associated with corruption and inefficiencies. The government has provided intermittent support to numerous local cooperatives, often with the stated objective of undertaking collective marketing of coffee beans and so thereby replacing the role of local collectors (tengkulak), who are believed to exploit farmers (which, as argued elsewhere, may be a misdiagnosis of the problem). Most, however, struggle to compete with existing trade networks, which are usually more efficient and so able to offer higher prices to farmers in addition to pre-harvest finance. Some cooperatives also struggle with quality control. Existing coffee-related cooperatives are commonly dependent on the support of either the government or on partner private-sector firms. Indeed, it is quite common for cooperatives to be established by exporter firms as a means to facilitate compliance with sustainability programs, and many are effectively managed by the exporters. The cooperative movement in Indonesia, 46
and in the coffee sector in particular, would require substantial support if it was to emerge as a pivotal player in the sector. Even then, there is little evidence to suggest that this would necessarily benefit individual farmers and the relative effectiveness of cooperatives in poverty alleviation in comparison to small rural business has not been well established (in the Indonesian context at least). Certainly, no systematic assessment has been hitherto conducted on the effectiveness of these organizational forms in the Indonesian coffee sector. De Wolf (2013) suggests that the “GOI could commission a thorough evaluation of the cooperative movement in Indonesia”, and this would be helpful to identify cases of successful farmer cooperatives across Indonesia in various commodities and to identify the underlying causes of success in these cases and the potential application of these learnings to the coffee sector. Farmer groups (consisting of around 20 to 30 member individual farmers) are the basic building blocks of producer organization, whose effectiveness ranges from being functionally inactive to being effective social institutions. Many groups would have been initially formed by local government offices (e.g. Disbun agencies) for the purpose of distributing material assistance packages (seedlings, fertilizers, credit, equipment), and many are the primary conduits for any government extension programs. Many districts maintain extensive government lists of farmer groups, whether or not the groups are active. The role of these groups will undoubtedly continue to be important in the future and collections of groups (known as Gapoktan) have emerged as more informal and less restrictive alternatives to cooperative structures, and have been assisted by some buyers for the purposes of certification. The absence of an active coffee farmers association in Indonesia, and the subsequent lack of legitimate representation in policy debates and program accountability, has already been presented as a serious limitation to industry development. The potential may exist to support nascent organizations such as the Indonesian Coffee Farmers Association (APKI), which already has branches in some growing districts, to better develop their capacity. Networking opportunities may also exist with broader ‘peasant organizations’ such as la Via Campesina, which until recently maintained an international secretariat in Jakarta, or with national organizations such as Serikat Petani Indonesia (SPI). Empowerment of an organization that might present a political threat as a ‘peasant movement’, however, is likely to encounter strong resistance from local and national elites. It is conceivable, however, that the Ministry of Agriculture could provide overarching patronage to a coffee farmers association, whose organizational capacity could be significantly enhanced through involvement in nation-wide data collection activities (as discussed in Section 3.2.2).
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IV. CONCLUSIONS AND RECOMMENDATIONS FOR THE COFFEE SECTOR ROAD MAP The Indonesian coffee industry is large, internally diverse and scattered. Production is dominated by smallholders living in remote villages with few formal state support structures and who are linked to international and domestic markets along increasingly integrated value chains. The smallholder structure of coffee production suggests that developments in the sector could have a significant impact on poverty alleviation and livelihoods in some rural areas of Indonesia. The Arabica sub-sector has offered farmers the opportunity to access higher quality specialty markets, and will be most effectively supported by encouraging skill and knowledge transfer from roasters to farmers. The Robusta sub-sector has tended historically to have less tight integration between farmers and end-users, but has witnessed recent dynamic growth in downstream processing. Across the two sub-sectors, roasting firms are demonstrating an increased interest in developing sustainability programs and are starting to initiate and encourage farmer development programs. This reflects perhaps the most dynamic development shaping the sector over the last decade. In contrast, the role played by the Indonesian government has historically been limited. The government has been involved in the sector through a small number of state-owned plantations (mainly in Java) and through short terms proyek (projects) to support farmers through provision of inputs, and support for developing cooperatives and local processing units (UPHs). However, there is no national coffee board and no agency is tasked specifically with providing supports to farmers. As a consequence of the fact that the Indonesian government has not historically performed an active role in coffee industry development, it possesses little capacity to provide such supports. Looking ahead, the government should develop opportunities to leverage resources from the private sector to support farm-level development in the sector. This is likely to involve innovative public-private partnerships. Three broad strategic opportunities can be identified to enable Indonesia to upgrade its position in the global value chains for coffee:
1. Product upgrading: Develop quality-differentiated coffee products as a way of valueadding Arabica coffee, particularly at the farm level. This would include producing higher quality green coffees that can be sold into both the domestic and international specialty coffee markets, the possible use of Geographical Indications, tighter integration with roasting firms and ultimately higher farm-gate prices. 2. Functional upgrading: Develop further national-level opportunities for value-adding green coffee beans by processing into instant and roasted coffees for both domestic and export markets, especially for Robusta coffee. The international competitiveness of this industrial processing sector will be enhanced through increased integration within regional and global production networks. This should be done keeping in mind that whether coffee beans are roasted domestically or exported will rarely affect the farm-gate price received by farmers. 48
3. Process upgrading: Improving farm-level productivity, livelihood resilience and sustainability by encouraging new models of technology transfer to farmers that would likely involve the enhanced involvement of the private sector, thus supporting a trend that is already happening. The emerging reality is that today’s global economy is characterised by global value chains and production networks, the trade in intermediate products, and a high degree of coordination by large corporate companies (see, for example UNCTAD, 2013). Involvement, and tighter integration, within these chains has been demonstrated to provide important opportunities for the transfer of skills, knowledge and technology across national boundaries. The global coffee industry is no exception. Indonesia can most effectively support product, functional and process upgrading in the sector through the ‘strategically coupling’ of opportunities and resources from within the value chain with supportive policy structures. This does not necessarily mean an absence of state involvement in the sector, but it does suggest the formulation of state policy that responds to value chain dynamics and governance structures in a way that exploits the opportunities on offer rather than formulating policy in isolation, or even in resistance to, such dynamics. Indonesia is likely to be best served by maintaining an open trade regime in coffee products that would allow imports of green beans for local bending and processing, whilst also not restricting options for farmers to exploit opportunities in higher-valued specialty markets that would most likely be maintained through the export of green beans. Similarly, foreign investment in the Indonesian coffee sector appears to be a highly effective mechanism for encouraging skills and technology transfer. The government could consider innovative ways to facilitate and enhance the provision of farmer supports by the private sector, and to provide a supportive institutional framework for that to occur. Going forward, we have presented basically two scenarios for the coffee industry in Indonesia. The first scenario would be a "business-as-usual" scenario whereby the sector will continue to move along at its current level of output without facing any major issues or threats. Performance will remain below that of major competitors. The country would continue to struggle to reposition itself in the new fast-growing domestic and regional markets, for Robusta coffees, with some even predicting a long-term need to import coffee beans. Yields would remain very low compared to major competitors and farmers would not have the means to invest in improving cultivation practices and rejuvenating their plantations. This would not put Indonesia on a sound and sustainable competitive position even on the low value/high volume market for coffee. Nor does it offer any bright perspectives for the majority of the 2 million farm households involved in the sector. Under the second, more ambitious scenario, Indonesia has the potential and the opportunity to reposition itself within the global value chain for coffee by engaging in: (i) product upgrading (quality differentiation); (ii) functional upgrading (downstream processing of raw beans); and (iii) process upgrading (improved farm-level productivity). Indonesia has the capacity and the 49
potential to create and manage powerful forms of product differentiation in fast-growing markets for coffee that can translate to substantial market advantages. Given the limited capacity, and coffee-specific expertise, within existing Government structures, these upgrading trajectories are most likely to occur through strategically identifying opportunities, resources and points of leverage from within the value chain itself and partnering with the private sector. The government should develop opportunities to leverage resources (particularly for farmer training) from the private sector to support farm-level development through innovative public-private partnerships. To achieve the above vision, there are a number of areas where government could play a critical role to put the sector on a more dynamic and sustainable growth path, improve farm incomes and provide environmental benefits, as well as contribute to reducing rural poverty. Possible initiatives include: (1) Building stronger sector institutions. Improved national-level industry coordination would help harness the high-degree of private sector interest and involvement in activities throughout the value chain. The Government of Indonesia could establish an equivalent of an ‘Indonesian Coffee Board’ or ‘Dewan Kopi Indonesia’ in a similar structure to the existing ‘Dewan Kakao Indonesia’. This could perform a high-level coordination function for the industry. The Board would liaise with and support Public Private Partnership (PPP) organizational structures that would be responsible for implementing development activities in producing regions. The IDH-supported Sustainable Coffee Program, with its secretariat in Jakarta, is emerging as an effective PPP-like organizational form in the Robusta sub-sector that could be further supported by the Board and the Ministry of Trade. The absence of an active coffee farmers association in Indonesia, and the subsequent lack of legitimate representation in policy debates and program accountability, presents a further limitation to industry development. The Government of Indonesia, presumably though the Ministry of Agriculture, could support a coffee farmers association (such as APKI) and establish a results-based capacity building fund and implement needed training and advisory programs. (2) Promoting private sector led partnership models involving farmers, traders and roasters that encourage knowledge transfer regarding quality requirements, sustainability and productivity improvements. Such innovative models of Public-Private Partnership (PPPs), such as those being developed through the PisAgro initiative, would enable government to effectively harness private sector dynamism to deliver improved technical and agronomic services to Indonesian coffee farmers, including in relation to soil nutrition, replanting and pest management. This could be done through a competitive matching grant mechanism open to both domestic and foreign operators, which could support and encourage private investment in replanting initiatives, agricultural extension activities and applied research. (3) Putting in place a solid and reliable data and information system in the sector. This would include the development of enhanced data collection techniques to develop a national coffee database, which might include integration with other available data 50
sources (eg. trade data and the National Agricultural Census). It would appear that there are essentially two alternative approaches here: i) developing the capacity of existing public institutions, such as the National Statistics Agency (BPS) or Ditjen Perkebunan (the Directorate General for Estate Crops), to collect and manage coffee data (although this would presumably need to be integrated within new data collection systems right across the Indonesian agricultural sector); or ii) support coffee-specific data collection systems within a Public-Private Partnership (PPP) that would harness the data collected by private sector partners (a similar initiative is currently being undertaken in the cocoa sector through the Cocoa Sustainability Partnership). (4) Promoting coffee-based agroforestry farming systems. Coffee is currently incorporated within several community-based forestry programs across Indonesia, and could be further promoted as part of broader initiatives to improve hydrological functions within degraded lands. Mixed agro-forestry systems could help to minimize the environmental footprint of coffee cultivation, increase ecosystem benefits, and contribute to improved risk management for rural livelihoods. The Ministry of Forestry is ultimately responsible for regulating community forestry programs in Indonesia and could be supported to ensure necessary regulatory reforms are undertaken. This could be supplemented by an active community support program for coffee-based agroforestry development in selected locations, with the provision of coffee-specific technical advice. (5) Support the role of sustainability programs in the sector. The establishment of a new national standard (eg. ‘IS Kopi’) to compete with existing certification marks is not recommended. Careful consideration and study of the costs, benefits and underlying rationales associated with certification schemes and sustainability programs are still required. Instead, the Ministry of Trade and the suggested Indonesian Coffee Board could alternatively provide appropriate supports for private sector sustainability programs in the sector to ensure development outcomes are maximized for participating farmers. Furthermore, the Government could ensure that existing certification requirements are appropriately embedded within Indonesian legislation and to align regulations on issues such as banned chemicals and land use change. A non-competitive government standard that augments and strengthens existing marks would be far more desirable than a new competing mark. (6) Support the effective development of Geographical Indications (GIs). While eight GIs have already been established in the Indonesian coffee sector, the development benefits of these initiatives remain unclear and untested, and the GIs remain virtually unknown in the international coffee market. A much improved understanding of how GIs could contribute to economic development is required, and a convincing argument about the benefits of a GI needs to be better articulated to ensure private sector engagement. In order to progress with the use of GIs as a rural development tool, an evaluation of the impacts of existing GIs in Indonesia is urgently required alongside a review of the regulatory framework for GIs. Such a review would be timely and provide a solid platform to proceed with the institutional improvements required to allow the potential benefits of GIs to be realized in the sector. This would lead to a convincing ‘theory of 51
change’ about the benefits of GIs that would support an awareness-raising campaign amongst private sector actors. (7) Ensuring a supportive policy framework for downstream industrialization. Substantial growth potential exists for the downstream processing of Robusta coffee into instant coffees, 3-in-1 coffees and Ready-to-Drink products for both the domestic and international markets. This growth is likely to occur through relatively large-scale investments due to the technological requirements in this pro cessing sub-sector. The roasting of Indonesian Arabica coffees, on the other hand, is more likely to occur through SMEs and will likely remain focused on the growing domestic specialty coffee market in the foreseeable future rather than export markets. In both cases, an open trade regime is required to ensure that processors have access to a variety of international coffees as required for blending purposes, even though the total volume of green coffee imports is expected to remain low. Similarly, foreign investment in downstream processing is expected to continue performing a critical role in stimulating innovation and competitiveness in the sector. There may be scope for the government to develop an incentive framework to encourage investment in these activities by both foreign and domestic investors, although putting restrictions on the exports of unprocessed coffee is not recommended.
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Appendix A List of Background Technical Reports Arifin, Bustanul (2012). Improving the Sustainability and Competitiveness of Agricultural Export Commodities in Indonesia, (July 2012) De Wolf, Cornelis (2013). Lessons Learned and Opportunities for Scaling-up of Successful Models of Value Chain Development for Smallholder Coffee, Cocoa and Tea (May 2013) Giovannucci, Daniele (2013). Opportunities for Adding Value: The coffee, cocoa and tea industries of Indonesia, (May 2013). Diaz Rios, Luz (2013a). Evolving Role of Commodity Authorities in Coffee, Cocoa and Tea Sectors, Report to World Bank, March, 2013. Diaz Rios, Luz (2013b). Market Promotion Initiatives: Experiences from cocoa, coffee and tea sector, Report to World Bank, March 2013. Sendall, Adam (2013). Rapid Appraisal of the Indonesian Coffee Sector, (January 2013)
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Appendix B Other Publications Arifin, B., Geddes, R., Ismono, H., Neilson, J. and Pritchard, B. (2008). Farming at Indonesia’s forest frontier: Understanding incentives for smallholders, Australia Indonesia Governance Research Partnership Policy Brief No. 6, Crawford School of Economics and Government at ANU, Canberra. http://www.aigrp.anu.edu.au/docs/projects/1017/neilson_brief.pdf D’haeze, D., Deckers, J., Raes, D., Phong, T. A., & Minh Chanh, N. D. (2003). Over-irrigation of Coffea canephora in the Central Highlands of Vietnam revisited: Simulation of soil moisture dynamics in Rhodic Ferralsols. Agricultural Water Management, 63(3), 185-202. D’haeze, D., Deckers, J., Raes, D., Phong, T. A., & Loi, H. V. (2005). Environmental and socioeconomic impacts of institutional reforms on the agricultural sector of Vietnam: Land suitability assessment for Robusta coffee in the Dak Gan region. Agriculture, ecosystems & environment, 105(1), 59-76. Daviron, B., & Ponte, S. (2005). The coffee paradox: Global markets, commodity trade and the elusive promise of development. Zed books. Diaz Rios, L, (2014). Evolving Industry Structure, Governance and Service Provision presentation made for the Coffee Lovers Group, World Bank, Washington Direktorat Jenderal Perkebunan - Kementerian Pertanian (2013b). Buku Statistik Perkebunan Tahun 2008 - 2012, available at http://www.deptan.go.id/infoeksekutif/bun/isi_dt5thn_bun.php (accessed 18 December, 2013) vice Provision, Presented at the DC. ICO - International Coffee Organization (2013). Exports of organic coffee and differentiated coffees Calendar years 2005 to 2012. SC 26/13 [ICO Document]. London: International Coffee Organization (ICO). (SC, 26/13). ICO - International Coffee Organization (2014).Trade Statistics. Accessed 11/11/2012, www.ico.org, London: International Coffee Organization (ICO). Kumar, P. (2011). Indonesia Food and Agribusiness Outlook: Leading the Southeast Asian Growth Story. Rabobank International. Utrecht. McMahon, P., Iswanto, A., Susilo, A. W., Sulistyowati, E., Wahab, A., Imron, M., ... & Keane, P. (2009). On-farm selection for quality and resistance to pest/diseases of cocoa in Sulawesi:(i) performance of selections against cocoa pod borer, Conopomorpha cramerella. International Journal of Pest Management, 55(4), 325-337. Menteri Koordinator Bidang Ekonomi Indonesia (2011). Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia, Jakarta. Ministry of Agriculture (2013). Outlook Komodoti Kopi 2013, Pusat Data dan Sistem Informasi Pertanian, Ministry of Agriculture, Jakarta, Available at http://epublikasi.setjen.pertanian.go.id/download/file/115-outlook-kopi-2013 (accessed 22/12/2014). Neilson, J. (2007). Institutions, the governance of quality and on-farm value retention for Indonesian specialty coffee. Singapore Journal of Tropical Geography 28 pp.188-204. Neilson, J. (2008). Global private regulation and value-chain restructuring in Indonesian smallholder coffee systems, World Development, 36 (9), 1607-1622. Neilson, J. Hartatri, D. S. F. and Lagerqvist, Y. F. (2013). Coffee-based livelihoods in South Sulawesi, Indonesia, Appendix B to the Final Report for ACIAR PROJECT SMAR/2007/063, Available at www.aciar.gov.au Neilson, J., Meekin, A. and Fauziah, K. (2013). Effects of an Export tax on the farm-gate price of Indonesian cocoa beans, Proceedings of the Malaysian International Cocoa Conference, October 2013, Malaysian Cocoa Board, Kota Kinabalu. Pp. 295-300. Neilson, J. and Hartatri, D. S. F. (2014). Relationship Coffees in the specialty coffee sector: What benefits for Indonesian smallholders? Proceedings of the 25th International Conference on Coffee Science, Colombia, September 8-13, 2014, Association for Science and Information on Science (ASIC), Paris. 54
Neilson, J. and Shonk, F. (2014). Chained to Development? Livelihoods and global value chains in the coffee-producing Toraja Region of Indonesia, Australian Geographer, 45 (3). 269-288. Schroth, G., Läderach, P., Cuero, D.S.F., Neilson, J., and Bunn, C. (2014). Winner or loser of climate change? A modeling study of current and future climatic suitability of Arabica coffee in Indonesia, Regional Environmental Change, November 2014, pp1-10. UNCOMTRADE (2014). UN Commodity Trade Statistics Database, Accessed at 05/06/2014. www.comtrade.un.org UNCTAD (2013). World Investment Report 2013. Global Value Chains: Investment and Trade for Development. United Nations Conference for Trade and Development (UNCTAD), Geneva. USDA GAIN (2014). Indonesia Coffee Annual 2014, Global Agricultural Information Network (GAIN), USDA Foreign Agricultural Service. Available at: http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Coffee%20Annual_Jakarta_Indonesia_514-2014.pdf (Accessed 25 September, 2014). Verbist, Bruno, Andree Eka Dinata Putra, and Suseno Budidarsono. (2005). Factors Driving Land Use Change: Effects on Watershed functions in a Coffee Agroforestry System in Lampung, Sumatra. Agricultural Systems 85, pp: 254–270.
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