Shade Coffee at the Altar of Sacrifice

Dr. Anand is a Technical Consultant for Canara Bank (A Govt. of India Enterprise).

Agriculture is the life blood of most developing countries. In India the backbone of the nation is dependent on agriculture. In fact, the gross domestic product (GDP) which is an International barometer indicating the health of the economy directly depends on agriculture.

Looking back in time, Shade grown Coffee Plantations have played a significant role in contributing to the GDP of the Country and more importantly, providing much needed foreign exchange during the early part of this century. Today, the situation is very different. The global crisis of plummeting price realizations below the average cost of production, over the last four years has taken coffee growers to the brink of disaster. Costs had been cut to the bone, but the future is bleak.

Consecutive droughts, high pest and disease incidence, and non-availability of credit flow has forced traditional coffee farmers to abandon their estates and in many cases sell their farms at a distress price. Poverty is strewn across the length and breadth of the coffee country, with no hope of recovery. Nobody could comprehend alternate businesses or sources of revenue. We do not know if this is the beginning or end for coffee farmers world wide.

The survival of the eco-friendly plantations is hanging on a knife’s edge. The coffee crisis has been a worldwide phenomenon and the United Nations has declared coffee as a disaster crop. In spite of the Government announcing a slew of measures to restore self confidence among the farming community, nothing tangible was achieved.

The twin objectives of this article are first and foremost to salute the coffee farmers world wide for the unending sacrifices they make in conserving ecology and secondly to stir up the moral conscience of the world of coffee lovers to the inequalities we face. We strongly urge Governments, Roasters and Grinders that there should be a economic basis for what we are doing.

Coffee and the World Market

The procurement prices for both export and domestic traders are fixed on the basis of the London terminal market for Robusta Coffee & New York terminal market for Arabica Coffee. Basically, these terminals are operated by fund operators who at times breathe fire on the market or look for windfall profits and disappear.

Five years back the global demand and supply was evenly balanced but in recent years new entrants like Vietnam (NON TRADITIONAL COFFEE GROWING COUNTRY) has flooded the market with cheap quality Robusta beans. The excess glut in the market has depressed the prices.

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World Production of Coffee (in million Bags)
Year	Quantity
2000-01	114.80
2001-02	112.36
2002-03	109.36
2003-04	120.92

Zonal World Production of Coffee

Coffee growing regions can be categorized under four major zones, namely North and Central America, South America, Africa, and Asia / Oceania. In recent years, the production of coffee has declined in all zones except the Asia / Oceania zone.

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ZONAL World Production 2003-04 ( in millions bags)
Sl. No	Country	Production
I	North America
1	Honduras	2.91
2	El Salvador	1.25
3	Costa Rica	2.12
4	Guatemala	3.00
5	Mexico	4.55
II	South America
1	Colombia	11.75
2	Brazil	28.82
III	Africa
1	Kenya	1.00
2	Ethiopia	4.33
3	Uganda	3.10
IV	Asia
1	Thailand	9.97
2	India	4.50
3	Vietnam	11.25
4	Indonesia	6.01

Indian Coffee and the World Market

India’s share in the world coffee market is approximately 3.6%, producing about 300,000 metric tones of coffee of which 80% is exported and 20% (60,000 TONES) is consumed domestically. The State of Karnataka produces 70% of India’s production. If one were to study the Indian coffee market, then a very startling picture emerges. The Industry is not based on sound fundamentals or technicalities. Hither to, it completely relied on the misfortune of the Brazilian coffee. Any sign of frost in Brazil and prices of beans would touch unrealistic levels in India. Many a times the domestic price is much more than the International price.

chart3

Production of Coffee in India Since (In MT)
Year	Arabica	%	Robusta	Total	Exports
1997-98	99300	43	129000	228300	179059
1998-99	97000	37	168000	265000	211623
1999-2000	119000	41	173000	292000	244941
2000-2001	104400	35	196800	301200	246908
2001-2002	121050	40	179550	300600	231586
2002-2003	102125	37	173150	275275	207333
2003-2004	101950	38	168550	270500	232505
2004-2005*	116800	40	175600	292400	–
* Post Blossom forecast

Coffee Industry Status

The Indian coffee industry is a 180 year old industry. The Coffee Industry comes under the Ministry of Commerce which is generally associated with the country’s exports and imports. The Ministry as such has a faint idea with regards to the scale and economics of growing coffee and the problems associated with the bean.

For an outsider, to get a better insight of the Industry, the marketing policy is controlled by the Centre, but the land tenure comes under the State subject. Caught between the State and the Central Government, coffee is neither accorded agri-status nor Industry status. This creates a problem for credit flow as well as the coffee planter has to borrow money at a higher cost which reflects in his balance sheet.

This peculiar problem can be overcome by creating a separate entity clubbing both coffee and tea into one plantation Ministry. The Coffee Board created by the Ministry of Commerce is headed by an I.A.S. officer, instead of the grower’s representative. Moreover, the Chairman or Chairperson ‘s tenure is for a period of three to five years and every time a new appointee takes over he or she has to start from the bottom upwards. Precious time is lost and the grower is the one who bears the brunt of the policy decisions.

Next to oil, coffee is the largest traded commodity in the world. Especially, when it comes to coffee cultivation, the growing of coffee is restricted to third world countries or the developing world. Coffee is perennial, Eco-friendly in nature and labor intensive crop. It takes about 8 years for economic yield in case of Arabica and 10-12 years in Robusta. Around 250,000 growers are in the business of Coffee cultivation and 98% of these are small growers; holding less than 10 hectares.

The coffee cultivation involves labor to the tune of 70 %. Hence, it is a highly labor oriented industry. 70% of cost of production is wages to workers. About 1,500,000 families are directly dependent on the industry as a means of livelihood. The workers are mainly from the lowest strata of the society. As such coffee farmers provide employment to the unskilled Rural Population.

Forest Ecology

Indian Coffee is grown on one of the most sensitive hotspots in the world, called the WESTERNGHATS, which is a treasure house for flora, fauna and Biodiversity. Basically, Indian Coffee Plantations grow shade grown coffee in 400,000 hectares of land under the canopy of a three-tier shade system. On an acre of land 300 – 350 shade trees are grown.

The Govt. of India and the State Government spend huge sums to develop forests, but growers are voluntarily growing man made forests, since hundreds of years. The Government should divert the huge sum invested for the development of forest towards growers who are sustaining it. The crash in Coffee Prices may lead to rampant cutting of trees in plantation by all growers for sustaining and for their survival. Also, coffee farmers are guardians to thousands of acres of forests by protecting its biodiversity.

Sustainable and Ecofriendly Systems

By and large, Indian Coffee is associated with forest grown coffee. Mechanization is to a bare minimum and when one visits the plantation one can see trees haphazardly arranged. The soil is virgin and no serious effort is made to mechanize the plantation for the sole purpose of retaining the sustainable eco-friendly systems.

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Global Coffee Crisis

Coffee that is planted today will take 8 to 10 years to give economic returns. And when the plants are ready to yield; the prices may touch rock bottom.

In 1990, the world coffee market was a $30 billion a year industry, with the grower’s share hovering around $10 billion. Today, the market has increased to $54 billion, but the grower’s share is only $11 billion. This represents a drop from 33% to 11% in just ten years.

This decline in value translates into misery for the estimated 25 million people who are directly related to the plantations. Recently, an estimated 25,000 coffee producing families migrated to urban areas. Since the price of coffee has hit a 100 year low, the majority of the people who work in the coffee sector are struggling to feed their families while multinational corporations continue to prosper as a result of the low prices.

For the past decade the supply of coffee was in the hands of the grower and this was a key element in helping them realize a better price. However for the past 5 years the coffee stocks is in the hands of a few roasters and grinders and they dictate terms to the market as well as to the grower. We support the packaging of Indian Coffee inside the WTO-inspired Green Box and hope that it will be a good beginning toward solving some of the inequitable distribution of coffee-related wealth.

This industry is passing through a very critical period due to unprecedented crash in price since 1998. Added to this drought has hit the region for the past three years. The price of Arabica is lowest in past 35 years and that of Robusta Coffee the lowest in the last 100 years in Dollar Terms. There is a huge gap between the cost of production and realization. The gap is Rs. 20 / kg for Arabica and Rs 15/kg for Robusta. The estimated cost for Arabica works out to be Rs. 63 / kg and realization is around Rs.43/- kg only. Similarly, Robusta cost around Rs.31/kg, while realization is only Rs.16/ kg today (as per Mckinsy report) but growers are incurring higher losses / kg.

Many traditional planters have sold their estate to Industrialists because of the increasing debt burden. This is affecting the very fabric of the 180 year old Plantation Industry. New Entrants with deep pockets have the capacity to pump in money from other Industries and run their plantations but the traditional grower is forced to either abandon his estate or sell it at a distress price.

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OXFAM COFFEE INDIA

Industry Contribution

Indian coffee has supported the Government at a critical time when foreign exchange was scarce. More than 80% of the beans were exported and the best part of it all was that nothing in turn was imported for the plantation sector. Hence, coffee was a net foreign exchange earner. The coffee farmers without any external support managed to grow 300,000 tons of coffee, there by saving the Country millions of dollars of precious foreign exchange.

When the going was good the farmers ploughed back every rupee earned; back into the plantation and improved the productivity. The Govt. Of India has mopped up huge sum of money from the growers in the form of Export duty (Rs.6.4 billion), Excise Duty (Rs. 1.78 billion) and Purchase tax to the State Govt. (Rs.9.97 billion).

Employment Potential

Coffee is a labor oriented industry. About 1.2-1.5 million workers are directly or indirectly dependent on this industry. The workers are mainly from the lowest strata of the society. Most plantations, maintain a large work force in the estates on a regular basis. They are subjected to various statutory labor welfare measures like Plantation Labor Act, Payment of Bonus Act, Employees Provident Fund Act, and Group Insurance. They have to be provided work round the year.

Whether there is a crop on the bush or not, the workers have to be maintained without interruption of work. The labor cost, therefore should be treated as a fixed Cost and not variable, i.e., related to production. Hence, the fixed costs are high in Coffee Industry.

Plant vs Machinery

Plants are biological entities. Each cell within the plant acts as a biological factory which needs constant care and supervision. If one were to compare an Industrial Factory with that of a coffee plantation, there is so much of complexity associated with the plantation.

For example, if the cost of economics is not favorable in an Industrial unit, it can simply be shut and reopened during a favorable phase. Where as whether the plantation is productive or not, it requires to be tended like a garden, or else in no time will turn into a dense jungle. Pests and diseases will increase. To nurture it back to normalcy, it costs money and time.

Also, Utilization of Machinery and Buildings is Seasonal. With changing trends in world coffee, growers need to get into value added forms like specialty coffee. The growers are forced to invest more on capital investments on the estates. Unlike the Factory, the machinery like sprinkler, sprayers, pulpers and buildings like store houses to keep fertilizers for which loans are advanced to the estates are utilized for hardly two to three months in a year.

Plantation vs General Agriculture

Coffee Plantations are categorized as perennial Crops. The major difference between an ANNUAL and a perennial CROP is that plantation crops have long gestation period. In case of an Annual crop the farmer has the flexibility to switch over from once crop to another whereas a coffee grower cannot. Coffee is a permanent shrub and is only replanted in Robusta once in 75 years and 30 years in case of Arabica. Also, Expenditure is not directly related to Annual Yield.

Shade regulation, pruning of bushes, application of fertilizers, lime and other cultural practices have a long-term impact on the bush. For instance, pruning brings down the yield in that year, but the plants yield better in the subsequent years. Loss of Bush is a Capital Loss. As stated earlier coffee has a long gestation period of 10 – 12 years before it starts economic yielding. Therefore, when a plant is lost due to pest or disease or for any other reason, it is a capital loss, because the unit of production of the coffee bush declines.

Devaluation of Currency vs U.S. Dollar

In India the rupee was devalued in 2000 as against the year 1995 for other major Coffee Producing Countries (currency depreciation). This is in spite of the fact that India fared outstandingly well in production, productivity and quality during the last decade. The ultimate result is that India looses its competitive edge in realizing a better price for its produce. Also the local inflation rate within the Country is around 8 to 10%.

COUNTRY	PERCENTAGE
India	31.99
Vietnam	32.21
Kenya	40.59
Tanzania	50.45
Costa Rica	65.53
Paraguay	78.15
Brazil	102.06
Colombia	118.69
Papua New Guinea	120.15
Indonesia	313.27

Debt Burden

The coffee farmers need a constant credit flow for running the plantations. As such it is normal for the farmer to approach the banks for loans. However due to the prolonged crisis and the cost realization below the cost of cultivation the farmers are in a helpless situation.

Debt ridden plantations are at the mercy of pests and diseases. This will result in a situation where the asset value of the plantations will decrease tremendously and the grower will not be in a position to pay the interest and the Principal amount. If one were to look at the earlier track record of coffee farmers; for the last five decades the coffee grower has diligently repaid all the loans with interest, even when the interest was as high as 24%. The percentage of non performing assets (NPA) in plantation industry before the crisis was negligible at 0.1%.

Socioeconomic Disorder

The effect of Price decline has affected all sections of the plantation community starting from the lowest rung of the ladder. Credit flow has come to a complete standstill. Plantation owners are giving work for only four days in a week. Labor force has been reduced by more than 40%. There is a mass exodus of labor to urban neighborhoods. Survival of 250,000 growers and 1,500,000 workers is at stake. For the first time the growers are voicing there inability to survive and sustain. Children are pulled out of school for want of money.

Chart-4

Karnataka Growers Federation (KGF) and Hassan Plantar’s Association (HDPA)

The KGF and the HDPA are at the fore front in highlighting the grower’s problems. Numerous delegations and representations to the State as well as the Central Governments are now slowly translating into small positive results. Karnataka Growers’ Federation represents over 100,000 coffee and spice growers in the Hassan district of Karnataka, a state in Southern India. It is a member of the Global Coalition for Coffee and other commodities, facilitated by Oxfam.

Plausible Solutions

Creation of a separate coffee and tea plantation ministry.
Respective boards should be headed by Growers representative.
Allow import of machinery free of import duty.
Accord Industry status to coffee.
FDI investment to be hiked to 100%
National Bank for Agriculture and Reconstruction Development (NABARD)should lend loans directly to the growers, without allowing intermediary banks to disburse the same at high interest rates.
The Government should pay a minimum release price for every bag of coffee based on the New York and London terminal. If the International price moves up automatically, the Government can withdraw or else charge a small compensatory cess.
One time waiver of all loans.
Creation of a price stabilization fund with 100 Billion. (Indian rupees )
Providing crop insurance.
Ensuring constant credit flow.
All shade grown plantations to be put under the GREEN BOX category of GATT so that a fair price is realized by the grower.
Allow National Dairy Development Board to sell coffee as it complements milk.
Allow only 25% chicory mixture in coffee brands to be phased out at the rate of 5% every year.
Ask International Coffee Organisation (ICO) OR Association of coffee producing Countries (ACPC) to impose quota system, such that coffee growing Countries are allowed a specific quota for exports. Something like OPEC.
World Bank to subsidize ECOFRIENDLY contributing plantations.

TOP 15 COFFEE PRODUCING COUNTRIES
Country	2003-04 (in Million Bags)
Brazil	48.48
Colombia	11.89
Vietnam	11.56
Indonesia	6.79
India	4.57
Guatemala	4.07
Mexico	4.00
Ethiopia	3.69
Uganda	2.91
Peru	2.90
Honduras	2.50
Cote d’Ivoire	2.48
Costa Rica	1.94
El Salvador	1.44

Oxfam International

18th September, 2002, UK Oxfam launches ‘Coffee Rescue’ plan. Francesca Arhin from Oxfam leads a protest in the City Corporate giants that make huge profits from selling coffee should be forced to pay farmers a decent price, according to the latest campaign from Oxfam. The charity claims that with coffee prices now at a 30-year low, as many as 25 million people who depend on the crop for a living are being forced into poverty. Oxfam is launching a “Coffee Rescue Plan” urging political and business leaders to take immediate action, such as destroying surplus stocks and guaranteeing a fair price for farmers.

Oxfam claims export sales from poor countries were worth 30% of the total coffee market 10 years ago, but are now worth only 10%. The organization is criticizing the World Bank and International Monetary Fund for encouraging poorer countries to expand their export business without warning them of potential price crashes.

Conclusion

The world is celebrating Christmas, or so it seems, at the wrong time of the year. The spirits are high but underneath the festivity there lies a somber reality, something that all of us need to know.

The OXFAM REPORT (2002) has this to say : Designer coffee-bars selling mochaccinos; supermarket aisles dedicated to new specialty roasts and blends; major brands worth more than US$1 billion a year; – walk down most High Streets and you’d be forgiven for thinking it was boom-time in the coffee industry. But for some it’s not. Allowing for inflation, today, farmers receive just 25 per cent of the price they were paid in 1960. Falling prices have forced coffee growers to take their kids out of school, watch their families suffer without medicines and cut back on basic food. Oxfam is campaigning to tackle a catastrophe. Action must be taken now, to help the millions of coffee farmers and their families who are facing ruin.

Oxfam is attacking what it calls the big four coffee companies – Kraft, Sara Lee, Procter & Gamble and Nestle – which it says buy nearly half the world’s coffee crop between them. The charity argues that the companies make huge profits while farmers receive only 5% of the retail price. “They know there is terrible human suffering at the heart of their business and yet they do virtually nothing to help,” said Oxfam’s campaigns director Adrian Lovett. Oxfam wants governments and business leaders to change practices to reverse the current situation of supply far-exceeding demand. It suggests they trade only in quality coffee, pay farmers a decent price and back ICO attempts to rectify the problem ‘Stunning policy failure’ Oxfam estimates 8% more coffee is produced than necessary every year, causing a slump in export prices.

World wide many coffee growing Nations have already taken remedial measures on a war footing. Interest has been waived and credit flow established at very nominal interest rate spread out over a decade.

In India, the Ministry of Commerce needs to do some soul searching parliamentary arithmetic and bail out the coffee farmer with a special economic package to solve the coffee grower’s problem. If the package is beneficial to the grower; then the contents there in will resonate to the nearby coffee mountains and bring back the health of the unique coffee ecosystem. If not we are certain that if no remedial measures are taken, then in every likelihood, coffee cultivation will be wiped out from the map of India. Let’s hope we are not facing an environmental nightmare. The war is far from being won. It is now time to take the initiative to change the past and bring about sound fundamentals and technicals into the coffee industry.

Acknowledgement

The authors wish to express their heartfelt gratitude to:

Dr. S. RADHAKRISHNAN, Deputy Director, (MARKET RESEARCH), Coffee Board, Bangalore. For providing the coffee data and tables.
Mr. ALLEN J PAIS, Coffee Planter, PROVIDENCE ESTATE ,Siddapur, Coorg, Kodagu. For modeling the graphs and charts.