Information Centre for Agricultural Oxfam Great Britain and

and Rural Development (ICARD) Oxfam Hong Kong

THE IMPACT OF THE GLOBAL COFFEE TRADE

ON DAK LAK PROVINCE, VIET NAM:

ANALYSIS AND POLICY RECOMMENDATIONS

Final

September 2002
 Contents

Acronyms and abbreviations.. v

Acknowledgements.. vi
Chapter 1 Introduction ......................................................................................................... 1
1.1 Justification and objectives of the research ................................................................... 1
1.2 Research sites ............................................................................................................... 1
1.3 Research methodology .................................................................................................. 2
1.3.1 The team ............................................................................................................ 2
1.3.2 Qualitative research ........................................................................................... 2
1.3.3 Quantitative research ......................................................................................... 3
1.4 Limitations of the research............................................................................................. 4
1.5 Structure of the report .................................................................................................... 4
Chapter 2 The coffee market: global to local ..................................................................... 5
2.1 The global coffee market ............................................................................................... 5
2.1.1 The coffee trade in the 20th century ................................................................... 5
2.1.2 Coffee consumption ........................................................................................... 6
2.1.3 Production and trade today ................................................................................ 6
2.1.4 Attempts to stabilise the world coffee price........................................................ 7
2.1.5 The future........................................................................................................... 8
2.2 Viet Nam and the global coffee market.......................................................................... 8
2.2.1 A rapid increase in coffee cultivation.................................................................. 8
2.2.2 Coffee: a key export ........................................................................................... 8
2.2.3 Low domestic consumption................................................................................ 9
2.2.4 Tight links with the global economy ................................................................... 9
2.2.5 Admission to the WTO ..................................................................................... 10
2.2.6 The Vietnamese coffee market and TNCs ....................................................... 10
2.3 Coffee production in Dak Lak province ........................................................................ 11
2.3.1 Society, economy, and environment ................................................................ 11
2.3.2 An increase in coffee production...................................................................... 12
2.3.3 Production costs............................................................................................... 13
2.3.4 Processing and export of Dak Lak coffee ........................................................ 14
Chapter 3 Stakeholders in the local coffee market ......................................................... 17
3.1 Households in the survey area .................................................................................... 17
3.2 Coffee-growing households ......................................................................................... 19
3.3 Ethnic minority women................................................................................................. 19
3.4 Private middlemen and coffee export businesses ....................................................... 20
Chapter 4 The impact of coffee production and trade on Dak Lak ................................ 22
4.1 The impact on livelihoods ............................................................................................ 22
4.1.1 Changing living standards................................................................................ 22
4.1.2 Increasing population density........................................................................... 22
4.1.3 Food insecurity................................................................................................. 23
4.1.4 Reduced school attendance............................................................................. 23
4.1.5 Changing income sources................................................................................ 24
4.1.6 Indebtedness.................................................................................................... 27
4.1.7 Insufficient capital............................................................................................. 28
4.1.8 The need for cash and even lower selling prices ............................................. 29
4.1.9 A new need for (weak) extension services....................................................... 30
4.1.10 Limited benefits from input-support programs.................................................. 30
4.1.11 Price information: less relevant, less accessible.............................................. 31
4.1.12 Deforestation.................................................................................................... 31
4.1.13 Land shortage .................................................................................................. 32
4.1.14 Water resources............................................................................................... 33

ii
 4.2 A look at the stakeholders............................................................................................ 33
4.2.1 The impact on coffee monoculture households ............................................... 33
4.2.2 The impact on diversified households.............................................................. 34
4.2.3 The impact on the poor .................................................................................... 34
4.2.4 The impact on ethnic minorities ....................................................................... 35
4.3 Coping strategies ......................................................................................................... 36
4.3.1 Coping strategies of the rich ............................................................................ 36
4.3.2 Coping strategies of medium-off and poor households.................................... 37
Chapter 5 Simulations of the impact of current and future policies on coffee
production and producers in Viet Nam ............................................................................ 39
5.1 The impact of current policies ...................................................................................... 39
5.1.1 Increasing coffee production ............................................................................ 39
5.1.2 Temporary storage........................................................................................... 40
5.1.3 Encouraging exports ........................................................................................ 40
5.1.4 Providing subsidies .......................................................................................... 41
5.1.5 Extension policy ............................................................................................... 41
5.2 Potential impact of future policies ................................................................................ 42
5.2.1 Reducing area planted to coffee ...................................................................... 42
5.2.2 Increasing farm gate prices.............................................................................. 43
5.2.3 Increasing productivity ..................................................................................... 43
5.2.4 Foreign exchange policy .................................................................................. 44
5.2.5 Narrowing the price gap between Viet Nam and other countries..................... 44
Chapter 6 Conclusions and Recommendations .............................................................. 45
6.1 Conclusions ................................................................................................................. 45
6.2 Recommendations ....................................................................................................... 46
6.2.1 Key policy recommendations ........................................................................... 46
6.2.2 Strengthening support to farmers..................................................................... 48
6.2.3 Improving competitiveness............................................................................... 49
6.2.4 Strengthening poverty reduction ...................................................................... 50
References. 52
Annex 1: Research sites 53
Annex 2: PAM Framework. 56
Annex 3: Econometric Models. 59

Tables
Table 1 Transnational coffee companies and their affiliates..................................................11
Table 2 Increasing yield, area and output of Dak Lak coffee, 1990-2000 .............................13
Table 3 Average production costs and DRC index for Dak Lak coffee, 1994-1999 ..............13
Table 4 Coffee transportation costs, 2001.............................................................................15
Table 5 Comparison of wellbeing ranking characteristics by district .....................................17
Table 6 Gender divisions in work and decision-making in ethnic minority families ...............20
Table 7 Ownership of various assets by district (%)..............................................................22
Table 8 Difficulties of households by district (%) ...................................................................22
Table 9 Differences between food-shortage and food-sufficient households ........................23
Table 10 Income from coffee and as a percentage of total household income by district and
household type, 2001 (VND million) ..........................................................................25
Table 11 Agricultural land use by district (ha/household) ......................................................25
Table 12 Other income sources of coffee producers.............................................................25
Table 13 Debt by household type and source (VND million) .................................................27
Table 14 Average selling price of coffee by household type, 2001 (VND/kg)........................30
Table 15 Coffee purchasers by household type, 2001 (%)....................................................30
Table 16 Average area and age of coffee trees by district and household type (ha and years)
...................................................................................................................................35

iii
Table 17 Values of some variables measuring subsidy policy impact...................................41
Table 18 Export price (US$/ton) of Vietnamese coffee as a function of changes in coffee
output of Viet Nam and Brazil ....................................................................................42
Table 19 Impact of improving productivity on profit and cost.................................................43
Table 20 Impact of reducing irrigation time on profit and cost ...............................................43
Table 21 Impact of exchange rate adjustments on profit and price .......................................44
Table 22 Impact on profit and price of narrowing the gap between Viet Nams export price
and the world price.....................................................................................................44
Table 23 The poverty situation by district ..............................................................................53
Table 24 Causes of poverty by district and province-wide (number of households) .............53
Table 25 Table 1 The Policy Analysis Matrix.........................................................................56
Table 26 Coffee Production & Export of Vietnam and Brazil ................................................59

Figures
Figure 1 Sustainable livelihoods framework ............................................................................2
Figure 2 World coffee price fluctuations, 1982-2002 ...............................................................5
Figure 3 World coffee output and exports................................................................................6
Figure 4 Coffee output of five countries, 2001 (million tons) ...................................................6
Figure 5 Market share of major coffee producers, 2001..........................................................9
Figure 6 Main importers of Vietnamese coffee, 2001 ..............................................................9
Figure 7 Domestic, export and world coffee prices,19902001 (US$/ton) ............................10
Figure 8 Market share of green coffee by TNC, 1998 ...........................................................10
Figure 9 Market share of roasted and instant coffee by TNC companies (1998) ..................11
Figure 10 Coffee-growing area by region ..............................................................................12
Figure 11 Coffee output by region .........................................................................................12
Figure 12 Coffee processing..................................................................................................14
Figure 13 The coffee chain in Dak Lak 2001: from producers to exporters...........................15
Figure 14 The wet processing coffee chain in Dak Lak .........................................................16
Figure 15 Migration to Dak Lak, 1976-2000 ..........................................................................23
Figure 16 Comparison of average debt of food-shortage versus food-sufficient households29
Figure 17 Differences in land area between food-shortage and food-sufficient households ....32
Figure 18 Drop in investment for fertiliser..............................................................................36
Figure 19 Vietnamese coffee export volumes and prices, 1990-2001...................................39
Figure 20 Export revenue and elasticity of demand ..............................................................40
Figure 21 Storage policy holds back the speed of price reduction rather than increasing
coffee prices...............................................................................................................41
Figure 22 Helping farmers diversify production .....................................................................48

Boxes
Box 1 No money for shoes ....................................................................................................24
Box 2 Banks are also in trouble .............................................................................................27
Box 3 Using a loan for a non-productive purpose makes repayment difficult........................28
Box 4 Middlemen with non-performing loans are also in a precarious position.....................29
Box 5 No money to apply extension lessons .........................................................................30
Box 6 Lower access to in-kind loans for the poor ..................................................................31
Box 7 The perennially poor" lack land ..................................................................................32
Box 8 No buyers for the farm!................................................................................................33
Box 9 Poor monoculture households suffer...........................................................................34
Box 10 The better-off are not very affected by low coffee prices...........................................34
Box 11 A poor ethnic minority household follows extensive cultivation .................................35
Box 12 Richer households keep their trees and hope ...........................................................36
Box 13 The poor still rely on coffee and cling to the hope of a better life ..............................37
Box 14 Cottona way out for coffee producers? ..................................................................38

iv
 Acronyms and abbreviations

ACPC The Association of Coffee-Producing Countries

Danida Danish bilateral aid agency
DARD Department of Agriculture and Rural Development
DRC domestic resource cost
EPC effective rate of protection coefficient
EU European Union
FAO Food and Agriculture Organisation
GDP gross domestic product
GSO General Statistics Office
HCM City Ho Chi Minh City
ICA International Coffee Agreement
ICARD Information Centre for Agricultural and Rural Development
ICO International Coffee Organisation
MARD Ministry of Agriculture and Rural Development
NEZ New Economic Zone
NPCI nominal protection coefficient of input
NPCO nominal protection coefficient of output
OGB Oxfam Great Britain
OHK Oxfam Hong Kong
PAM policy analysis matrix
PRA participatory rural appraisal
SOE state-owned enterprise
TNC transnational corporation
US United States
VAC vuon-ao-ca (integrated garden and fish pond production system)
VBARD Viet Nam Bank for Agriculture and Rural Development
VND Vietnamese dong
WTO World Trade Organisation

Exchange rate
US$1 = VND 15,000
(approximate; as of September 2002)

v
 Acknowledgements
This report has benefited from the contributions of many people. We would like to express
our sincere thanks to officials of the Dak Lak DARD and of the districts, communes, villages
and enterprises surveyed for spending their valuable time to facilitate our research and talk
with us about the research topic and many other things. Particular thanks go to the officials
who accompanied our team during the fieldwork and helped us interact with the local people.

We would also like to express our special thanks to the surveyed households, and especially
the women, who shared with us information on their lives, lifestyles, intentions and desires.
Without their active contributions, our research could not have been successful.

Due to the limited time and large scale of the research, and the complicated nature of the
issue studied, this report may contain some errors. We warmly welcomes comments from
readers.

vi
 Chapter 1 Introduction
1.1 Justification and objectives of the research

One of the negative impacts of trade liberalisation and increased dependency on exports is
stronger domestic price fluctuations. When prices increase substantially, excessive
production expansion may take place, which causes downward pressure on prices,
ultimately putting those in the coffee industry into serious crisis. Price fluctuations increase
the vulnerability of farmers as well as of people in the processing industry and some traders.

Dak Lak's experience is typical of the impact of trade liberalisation on producers and traders,
especially the poor. Coffee prices reached a historical high in the 1990s, precipitating over-
production and then price dampening. This has had a serious negative impact on the
livelihoods of Vietnamese coffee producers, particularly in Dak Lak province, the largest
coffee-producing area in Viet Nam.

Given current low global coffee prices, increasing globalisation, and the continuing move
toward trade liberalisation, such situations are likely to happen with greater frequency, while
farmers, especially the poor, will continue to be the most vulnerable to them. The purpose of
the research was to investigate:

1. Vietnamese coffee producers' living situation, desires, and reactions to the changes in
their industry, and the potential for them (and in particular the poor) to improve their
living situation;
2. The situation of and potential for coffee production in Viet Nam as a whole and Dak Lak
in particular; and
3. The policy changes needed to strengthen economic development and reduce the
poverty of Vietnamese coffee producers.

1.2 Research sites

Dak Lak province can be divided into three regions: 1

Region 1: Highly favourable for coffee growing (including Cu Mgar, Krong Ana, Krong
Buk, Krong Nang, Ea Hleo, and Dak Mil districts);
Region 2: Moderately favourable for coffee growing (including Dak Lap, Dak Nong, Buon
Don, Krong No, and Cu Jut districts); and
Region 3: Unfavourable for coffee growing (including Lak, Krong Bong, Ea Sup, and Ma
Drak districts).

After discussions with officials of the Dak Lak Department of Agriculture and Rural
Development (DARD) and consideration of relevant socio-economic factors, including
poverty levels, one district from each region was chosen:
Region 1: Cu Mgar district, with the largest coffee plantation area in the province (41,500
ha) and the highest living standard when coffee prices were high;
Region 2: Buon Don district, with the smallest coffee plantation area in the province
(3,500 ha); it is one of the poorest districts in this region; and
Region 3: Lak district, one of the poorest districts in the province (1,390 ha of coffee).

In each district, one commune with a relatively large coffee production area was selected:
Ea Pok commune, Cu Mgar district;
Ea Nuol commune, Buon Don district; and
Dak Phoi commune, Lak district.
1
These regions were identified by coffee experts in the Dak Lak Department of Agriculture and Rural
Development.

1
 After discussions with commune officials, three villages in each commune were chosen, with
priority given to sites with a higher percentage of ethnic minority people. In total, nine
villages were surveyed, including eight ethnic minority villages and one Kinh (ethnic
Vietnamese) village. Over 90% of households interviewed were E De and M'nong ethnic
minority people; therefore, most research results about households in this report are about
ethnic minority households.

1.3 Research methodology

1.3.1 The team

The research team was composed of 14 people from the Information Centre for Agricultural
and Rural Development (ICARD) of the Ministry for Agriculture and Rural Development
(MARD), the Department of Agriculture and Rural Development Policy, the Agricultural
Economics Institute, the Dak Lak DARD, Oxfam Great Britain (OGB) and Oxfam Hong Kong
(OHK). District and commune staff from the focus area also assisted the team in the field
work. Researchers from ICARD, OGB and OHK co-ordinated to design, organise, and
implement the survey, process data and prepare this report.

1.3.2 Qualitative research

A sustainable livelihoods framework was used for the qualitative research (Figure 1), within
which questions focused first on the livelihood outcomes of a number of households, and
then on those households' livelihood strategies. Many participatory rural appraisal (PRA)
tools were used, including an open form of wealth or wellbeing ranking, in-depth semi-
structured household interviews, focus group discussions (with women in particular),
ranking/scoring, timelines, timetables, cause-effect diagrams, card-writing, and institutional
analysis. Key issues examined included decision-making process trends on such topics as
investment, the marketing of coffee and agricultural diversification, and womens priorities.

Figure 1 Sustainable livelihoods framework 2

Policies, Livelihood
processes and outcomes
Livelihood structures
Vulnerability
capital Livelihood more income
context Natural laws, public strategies increased
resources policies, wellbeing
incentives, reduced
trends regulations of social actors vulnerability
Human
seasonality Physical
private sector
(men, women, improved
shocks policy and
households, food security
(in nature, communities) improved
behavior
environment, natural resource-
civic, political sustainability
markets, based and/or of natural
Social Financial and economic
politics) market-based resources
institutions
diverse
(markets, non-use:
culture) survival or values of
nature
secured

Fifty households were interviewed of which 44 were ethnic minorities (mainly E De and
M'Nong) and six were female-headed. Seventy-eight women in six focus groups were also
interviewed.

2
Neefjes, Koos, Environments and Livelihoods: Strategies for Sustainability, Oxford: Oxfam (2000).

2
The research group met with 53 key informants, including: (a) village representatives, such
as village heads, village elders, representatives of womens associations, and people with a
substantial understanding of local livelihoods, (b) the leadership of the Dak Lak DARD, (c)
employees of some enterprises specialising in processing, exporting and/or supplying inputs
for coffee production, (d) commune-based middlemen, (e) representatives of the district
branches of the Viet Nam Bank for Agriculture and Rural Development, and (f) leaders of all
surveyed communes and districts. Information was collected on the coffee market chain and
local enterprises, and on the processing and transportation characteristics of enterprises in
the chain.

The researchers facilitated wealth ranking in the nine villages by a total of 23 key informants
(18 men and 5 women). For the two or three larger villages, after drafting a socio-economic
map of the village, the research group randomly selected 50 households in each village to
be wealth-ranked, rather than carrying out the exercise for all households.

All qualitative information was cross-checked with the results of the quantitative household
surveys, leaders' and other key informants' ideas, and other relevant data from the
quantitative research and secondary documents.

1.3.3 Quantitative research

Two types of economic model were used in the quantitative analysis, Policy Analysis Matrix
(PAM) and econometric model . PAM was used to assess the impact of existing and
potential policies on a variety of factors, including the income levels of different coffee
producer groups in Dak Lak, especially the poor. As with other models, PAM is based on a
number of assumptions and binding conditions, and assesses the impact of a particular
policy or policy change by holding other factors constant. Therefore, the conclusions drawn
from the model are not flawless. But model-based assessments of trends and scales of
change can provide useful information to policy makers about the importance of each policy
to target groups. Policy makers can then decide which policies should be implemented in the
short term and the long term.

Econometric models were used to estimate the relations between Vietnamese export price
of coffee and the quantity of Vietnamese as well as Brazilian exports of coffee. Through
these models, ones can derive the optimal quantity of coffee production for Vietnam that
would maximize its export revenue. These results are useful information for policy-makers to
decide how much area of land should be allocated to coffee plantation, and policy-makers
then can implement different policies to achieve the targeted area. It should be notice that
the estimations of econometric models are based mainly on the empirical data of 1994-2001
provided by General Statistics Office (GSO).

In order to provide all necessary data inputs for the PAM model, two household surveys
were undertaken: (a) an in-depth quantitative survey of 175 households chosen randomly
from within each of the wealth-ranked groups in all surveyed villages; a detailed
questionnaire was used to gather data on the coffee production and processing and
consumption patterns of each wealth-ranking group; and (b) a broad-based quantitative
survey of 891 households, including 318 in Cu Mgar District, 310 in Buon Don District, and
263 in Lak District. For this survey, a short, simple questionnaire was used to gather general
information about the characteristics of coffee farmers in the three regions.

Finally, a commodity chain survey was carried out with 18 enterprises in the coffee
commodity chain (middlemen, processors, and exporters) in the three districts.

3
Secondary documentation was also collected and analysed, including research documents
relating to the coffee sector, information from newspapers and the internet, DARD
information on coffee research and production, and local development plans.

1.4 Limitations of the research

The research team faced a number of constraints which may have led to some errors in the
report, including:

a general paucity of data, as well as inconsistencies in existing data from various

sources, on coffee production in general, Vietnamese coffee prices, and Viet Nam's
competitors, especially over the long term. As a result, in a number of cases the
quantitative assessment had to rely on assumptions or the recommendations of
commodity experts in order to reach conclusions;
the fact that this report is one of the first efforts in Viet Nam to combine qualitative and
quantitative research into a single study. Differences in methodology and difficulties in
co-ordination should be understandable and were unavoidable;
researchers' inability to communicate directly with interviewees. Some households did
not speak Vietnamese and interviewers did not speak the ethnic minority languages
used in the area; and
inexact information from villagers. People had difficulty recalling the amounts of inputs
they used on their farms; records had not been kept systematically.

1.5 Structure of the report

This first chapter briefly describes the justification and objectives, research sites,
methodology and constraints of the research. An introduction to the research sites is given in
the Annex.

The second chapter describes the coffee market globally, in Viet Nam and in Dak Lak
province, and gives some details of coffee processing in Viet Nam.

The third chapter introduces the key stakeholders in the coffee business in Viet Nam,
including coffee-producing households and coffee-related enterprises.

The fourth chapter covers the impact of increased liberalisation of the Vietnamese coffee
trade on coffee producers and others involved in coffee trading, and discusses some of the
coping mechanisms of households hit by low coffee prices.

The fifth chapter summarises the results of PAM analysis on the impact of current and future
policies on the coffee trade and coffee trade stakeholders.

Finally, conclusions and recommendations drawn from the qualitative and quantitative
analysis are presented in Chapter 6.

4
 Chapter 2 The coffee market: global to local
2.1 The global coffee market

2.1.1 The coffee trade in the 20th century

The 20th century has seen a number of periods of high coffee prices due to supply deficits,
as well as the devastation of many economies due to the two World Wars, resulting in a
reduction in coffee demand and in coffee plantation areas. When economies stabilised after
World War II, an increase in the demand for coffee resulted in higher prices, which
encouraged developing countries to expand their coffee plantation areas. During the mid-
1960s, however, oversupply led to a collapse of the world coffee price. Since the 1960s,
coffee exports have been growing substantially despite controls instituted under various
International Coffee Agreements (ICA). At present, there are about 75 coffee-producing
countries, mainly in South America, Africa and Asia, employing about 10 million labourers
and producing approximately 6 million tons annually on a total area of over 10 million ha.
The coffee export volume has more than doubled from 40 million 60-kilo-bags/year in the
1960s to around 85-90 million 60-kilo-bags/year in the last two years.

Figure 2 World coffee price fluctuations, 1982-2002

Source: The World Bank, 2002.

During the period 1985-1992, the world coffee trade turnover was valued at about US$8.5
billion annually, with a record year reaching US$14 billion (for example, 1986) and a slow
year just US$6 billion (for example, 1992-93). In the 1990s, high coffee prices encouraged
producers to expand coffee production, especially in Brazil and Viet Nam. Between 1993
and 2000, the area of land under coffee production increased by 1.56%/year world-wide,
while productivity (production, or yield, per ha) increased by 2.45%/year. Brazil's coffee
cultivation area increased more slowly than the global average, at 0.76%/year, but its coffee
productivity increased nearly twice as fast, at 5.36%/year; production increased at
8.27%/year. During the same period, Viet Nam's coffee cultivation area increased
dramatically, by about 23.9%/year, and production responded with a huge jump of 20%/year
(in 1994, 1995, and 1996, production grew at the even higher rates of 48.5%, 45.8% and
33% respectively). Rapid yield increases notwithstanding, Vietnamese coffee productivity
(production, or yield, per ha) grew at roughly the same rate as Brazil'san average of
6.4%/year.

5
The world coffee supply is heavily reliant on weather conditions, especially in the largest
exporting countries of Brazil and Columbia. A 1994 frost in Brazil killed or damaged a large
proportion of Brazil's coffee trees, resulting in a global supply shortage and price surge in
1995. In a number of coffee-producing countries, coffee exports contribute as much as 80%
of foreign currency earnings, resulting in serious socio-economic problems when prices
fluctuate.

2.1.2 Coffee consumption

While coffee production is mainly a developing-country activity, coffee consumption takes

place primarily in developed countries such as the US, the EU countries, and Japan, and in
newly industrialised countries such as Singapore and Malaysia. Consumption of coffee
beans over the last 250 years has increased enormously, from 600,000 bags in 1750 to 94
million bags in 1995. While in the long term consumption is likely to continue to increase
along with economic growth and the continuing improvement in global living standards, in
the short term, consumption levels have proven to be, and likely will remain, quite volatile. 3
Total consumption value is forecast at US$50 billion/year.

2.1.3 Production and trade today

In 2001, the world coffee price dropped to its lowest level in 40 years: in 1999, the price of
Robusta was still relatively high at US$1,300/ton, but by January 2000 it had declined to
US$948/ton, by December 2000 to US$638/ton, and by 2001 to just US$500/ton. Similarly,
the price of Arabica dropped from about US$2,000/ton in 2000 to just half that in 2001.

Despite the price downturn, in 2001 the major coffee producers continued to increase
production (see Figure 3). Brazilian coffee production was 1.96 million tons, an increase of
7.1% over 2000, while production in Viet Nam and Colombia reached 847 thousand tons (a
9% increase) and 690 thousand tons (a 21% increase) respectively (see Figure 4). Total
world coffee production was 6.7 million tons (up 5.2% in comparison with 2000) including 4.2
million tons of Arabica and 2.5 million tons of Robusta.

Figure 4 World coffee output and exports Figure 3 Coffee output of five countries,
(million tons) 2001 (million tons)
2.5
7
2.0
6
1.5
5
1.0
4
0.5
3
0.0
2
l

a
am
zi

bi

si

al

1995 1996 1997 1998 1999 2000 2001

a

ne
om

m
tn
Br

te
e

do
ol
Vi

ua

output ex ports
In
C

Sources: ICARD and MARD, 2001.

Along with the increase in production, the volume of the global coffee trade also increased,
to 5.1 million tons, an increase of 1.1% over 2000. This represented an expansion in coffee
exports by all the major exporters, led by Viet Nam with an increase of 24%, Colombia next
with an increase of 8.44%, Indonesia at 8.28%, the Ivory Coast at 5.71%, and Brazil at
3.44%. At the same time, however, a number of other countries began to reduce their

3
German Coffee Association, 1997.

6
exports: El Salvador by 24.3%, Mexico by 24%, India by 12.17%, Honduras by 9.7%,
Guatemala by 5.61%, Peru by 4.26% and Uganda by 3.53%.

The increase in production in recent years has led to an oversupply of coffee world-wide,
while the relatively low economic growth rates of the major coffee importers such as the US,
Germany, Italy and Japan may have contributed to low growth in world coffee
consumptionjust 0.96%/year. This combination of oversupply and stagnant demand has
strengthened downward pressure on the global coffee price; according to available figures
for 2002, all exporting countries except Brazil have begun to respond with reduced exports.

The fall in coffee prices has considerably reduced the foreign currency earnings of coffee
exporters, caused serious difficulties for coffee producers, and forced many countries to
replace coffee with other higher-value cash crops.

2.1.4 Attempts to stabilise the world coffee price

Over the last 60 years, via several mechanisms and forums such as the Association of
Coffee-Producing Countries (ACPC) and the International Coffee Organisation (ICO), coffee-
producing countries have made many attempts to stabilise world coffee prices at levels
beneficial to producers. In 1945, an International Coffee Agreement called FEDECAME was
established by 14 Latin American countries to protect their interests, but it collapsed in 1956.
Two years later, seven Latin American countries signed an agreement to fix coffee export
quotas and control the exports of 15 Latin American countries, and in 1960, the IACO
attempted to co-ordinate with African coffee-growing countries; however, neither effort was
successful. In 1963, "the ICO was establishedat a conference [that had been] convened
by the United Nations the previous year as a response to fluctuations in prices and supply
and demand from the 1930s to the 1960s." The main original purpose of the ICO was to
administer the International Coffee Agreement (ICA) that had been created in 1962 to set
coffee supply quotas to limit the world supply of coffee and push up its price.

"[T]he first International Coffee Agreement came into force in 1962 for a period of five years,
and [the ICO]has continued to operate under successive Agreements negotiated since
then. These include the International Coffee Agreement 1968 (and its two extensions), the
International Coffee Agreement 1976, 1983 (and its four extensions) and the Agreement of
1994 (with one extension) approved by the Council for a period of five years beginning 1
October 1994. The latest, the 2001 Agreement, entered into force provisionally on 1 October
2001." The ICO currently has 63 members from producing countries all over the world. 4 The
ICO is only a forum of coffee producers, however, with no power to control export quotas for
coffee, and, as with any commodity agreement, has been prone to cheating and quota
breaking. 5

Since the decline of world coffee prices began in the early 1990s, producing countries have
continued the effort to co-ordinate by setting up guidelines to temporarily reduce export
volumes. These guidelines have been adopted by the ACPC, which includes 28 nations
controlling 85% of world coffee production. In 1993, a number of countries co-operated to
store 20% of coffee exports to try to reduce coffee supplies and raise prices, and in 2001,
the ACPC once again decided to temporarily store 20% of low-quality coffee to try to reduce
supply. The implementation of this plan by a number of countries, both ACPC members and
non-members, has had little effect on the price of coffee, however, so a further plan was put
forward by ACPC to destroy 5% of poor-quality coffee. This plan has not yet been
implemented.

4
Information and quotes from www.ico.org
5
Another effort in 1973 by 21 coffee-producing countries (accounting for 90% of world exports) to establish a
system to store 10% of export coffee collapsed in 1975.

7
The many ICAs signed since the 1960s to set export quotas to stabilise coffee prices have
served in part to distort market signals and widen the price gap between high-quality and
low-quality coffee.

Due to the lack of competition in the coffee market from developed countries, which are
consumers rather than producers, and to the strong competition among the coffee producers
(mainly the developing countries) for an increase in sales, relatively low trade barriers are
applied: green coffee beans face few import tariffs. Furthermore, there are no import tariffs
on processed coffee, whether roasted or instant, coming into the US. Processed coffee can
enter the EU tax-free from many African, Caribbean and Pacific countries, as well as from
many countries in Latin America (including Colombia, El Salvador, Guatemala, Honduras,
and Nicaragua). But other poor countries, such as India, Viet Nam, and East Timor, pay an
import duty of 3.1% on instant and 2.6% on roast and ground coffee, while Brazil and
Thailand pay tariffs of up to 9% on instant coffee.

2.1.5 The future

Fluctuations in the economies and income levels of importing countries and unstable
weather conditions in exporting countries have strongly influenced the supply of and demand
for coffee. This has led to significant fluctuations in world coffee prices. Speculative activities
in long-term markets and seasonal changes also make coffee prices difficult to forecast.
That said, due to the high level of global investment in coffee plantations in recent years, it is
estimated that supply will continue to exceed demand in the near future. World coffee
exports are expected to rise to 5.7 million tons while demand, not including demand for
reserves, will reach only 5.5 million tons by 2005.

2.2 Viet Nam and the global coffee market

2.2.1 A rapid increase in coffee cultivation

Coffee was first planted in Viet Nam at the end of 19th century. The coffee cultivation area
increased from several thousand ha in the early 20th century to 20,000 ha in 1975. From
1982 to 1988, the coffee production area was further expanded through investment from and
co-operation with former socialist countries.

By 1994, the total nation-wide coffee production area was 150,000 ha, or just 1.32% of Viet
Nam's total crop area. In the late 1990s, this area began to increase much more rapidly, by
an average of 20.7%/year, to 516.7 thousand ha in 2000, making up 4.14% of Viet Nam's
total crop area, and making coffee the third most widely planted crop after rice (which
accounts for 61.4% of total crop land) and maize (5.7%). Between 1980 and 2000, the
Vietnamese coffee production area increased 23 times while output increased more than 83
times.

2.2.2 Coffee: a key export

One of the main reasons for the rapid increase in the coffee cultivation area was the sudden
price surge in the world coffee market, which brought increased benefits to coffee producers.
The global coffee price increased considerably to US$1873/ton in 1994 and then to
US$2411/ton in 1995, due mainly to a severe frost in 1994 that substantially cut the coffee
production of Brazil, the worlds biggest coffee producer. Viet Nam gained substantial export
earnings at this time from coffee.

Along with the increase in cultivation area, coffee became one of the most important export
commodities of Viet Nam in the 1990s. Recently, its annual export value has ranged from
US$400-600 million, providing between 6% and 10% of national export revenues. Viet Nam

8
is now recognised as the second largest coffee exporter after Brazil, closely followed by
Columbia and Indonesia (see Figure 5). Viet Nam has also become the worlds largest
exporter of Robusta, providing 41.3% of the world market in 2001 (Robusta accounts for
99% of total coffee output in Viet Nam). However, during the first six months of 2002 there
was a sharp reduction of around 30% in Vietnamese coffee exports compared with the same
period in 2001.

Figure 5 Market share of major coffee Figure 6 Main importers of Vietnamese

producers, 2001 coffee, 2001

B razil
Other 25%
29% EU
Japan 66%
4%
Singapo re
5%
M exico
4%
Other
India Vietnam 8%
4% 16%
Guatemala
5% Co lo mbia
Indo nesia United
6% 11%
States
17%

Source: GSO and Customs Department. Source: ICO Coffee market report, June 2002.

Viet Nam exports coffee to 59 countries (see Figure 6), mainly the US, EU countries
(Germany, Switzerland, England, France, the Netherlands, Spain and Italy) and Asia (Japan,
Singapore, China, the Philippines, Malaysia and Indonesia).

Viet Nam has undertaken important steps towards expanding its export markets in recent
years, including diversifying trade relations with the region and the world, 6 signing a bilateral
trade agreement with the US, and accelerating its accession to the World Trade
Organisation (WTO). However, the expected impact of trade liberalisation in terms of tariff
reductions by importing countries will not have a great effect on the Vietnamese export
market, because tariff reductions are already large and anyway these countries generally
have low import tariffs (e.g. the US has a 0% import tax on green beans).

2.2.3 Low domestic consumption

Somewhat ironically, coffee consumption in Viet Nam remains low at around 30,000
tons/year, mainly in urban areas. In the future, with considerably improved living standards,
the domestic market will develop.

2.2.4 Tight links with the global economy

With over 95% of output for export and with an increasingly liberalised economy, the
Vietnamese coffee sector has become closely linked with the world coffee trade. Export and
domestic prices have reflected world price fluctuations. The difference between Vietnamese
export prices and international prices has gradually narrowed, though at a slow pace (see

6
China is considered by many as a future potential market. With fast increasing incomes, Chinese consumers'
preferences could change from tea to coffee, creating significant movements in the world coffee market.
However, the competition to get into this market is very tough. Russia and Eastern Europe are also viewed as
large potential markets.

9
Figure 7). In fact, Viet Nam's coffee trade is relatively more liberalised than its trade in other
agricultural products.

Until now, Viet Nam's coffee- Figure 7 Domestic, export and world coffee
related trade policy has been prices,19902001 (US$/ton)
geared toward further
liberalisation. Every enterprise 8000
now has the right to buy, sell and 6000
process coffee for export as well
4000
as domestic consumption. In
recent years, the level of the 2000
coffee export tax has been 0
reduced to 0% (zero per cent). 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
The world coffee price has clearly
had a direct and immediate Domestic price Export price World price
influence on Viet Nam's export
price and on farmers' selling Source: GSO and Customs Department.
prices.

2.2.5 Admission to the WTO

Though admission to the WTO offers Viet Nam a number of advantages, it could expose the
Vietnamese coffee sector to a number of new challenges as well, as international
regulations do not allow the application of many of the policies Viet Nam uses to support the
coffee industry. When markets are more closely linked, every price fluctuation in the world
market will rapidly be reflected in the domestic market, causing bigger changes in farmers
prices and incomes. Traders may also face a number of difficulties since the implementation
of trade commitments means fiercer competition with foreign enterprises, even at the first
stage of assembling agricultural products for processing.

2.2.6 The Vietnamese coffee market and TNCs

With a history of a state monopoly in coffee Figure 8 Market share of green

export, and the recent increase in involvement coffee by TNC, 1998
of the private sector, it is difficult to get a clear
picture of the degree of transnational
Others
corporation (TNC) activity in the Vietnamese Mitsubishi 44%
coffee market. However, it is known that 3%

Neumann and Volcafe, which dominate the Dreyfus

3%
international coffee trade (in 1998 they Man
controlled 29% of the market), are very active in 4%
Aron
Viet Nam, as are a number of other TNCs. 5%

Esteve
Roasters rely on international coffee traders to 6%
supply very large amounts of beans at short
Cargill Neuman
notice. At the same time, due to technological 6% 16%
advances, the traders are able to vary their Volcafe
13%
source of green coffee, since instant coffee can
now use a variety of beans rather than a single source to ensure taste and blend. These
factors, together with the large stocks in countries such as Viet Nam and Indonesia, mean
that TNCs can play producers in the region against each other to ensure the best possible
prices. The low price of Vietnamese coffee, and Vietnamese exporters' limited knowledge of
the international market, further increase the control of international traders over contract
terms for coffee quality and price.

10
Roasters such as Nestl and Philip Morris are Figure 9 Market share of roasted and
now able to source coffee at increasingly instant coffee by TNC companies (1998)
lower prices while ensuring that consumers
continue to pay high prices for an ever more Others
elaborate array of luxury instant coffees and 31%

speciality blends. Figure 9 shows the level of P hilip

control by just a few powerful players in the M o rris
roasted coffee market. Philip Morris, Nestl, Tchibo
25%

Procter & Gamble, and Sara Lee control 63% 6%

of the instant and roasted coffee markets with P &G
brands such as Maxwell House, Nescaf, 7%

Folgers, and Douwe Egberts. Nestl Sara Lee

Nestle
7%
dominates the instant coffee market and is 24%
estimated to have made a clear profit of 26
pence on every GB1 of instant coffee sold in Source (this and preceding Figure): van Dijk et. al., 1998.
the United Kingdom. Though roasted and
ground coffees are less profitable than instant coffee, large profits can still be still gained in
the instant coffee market; for instance, Sara Lee makes a substantial profit from its
beverages unit, which deals mostly in instant coffee.

Table 1 Transnational coffee companies and their affiliates

Company Affiliated companies and brands
Philip Morris Kraft Food, Jacob Suchard, Maxwell House, Splendid,
Grand Mere, CarteNoir, Lyons, Birds, Brim, Gervalia,
Maxim
Nestl Tasters Choice, Nescaf, Hills Brothers, Lite, Sarks, MJB
Sara Lee Douwe Egberts, Merrid, la Maison du Caf, Marcillia, Soley
Procter & Gamble (P&G) Folgers, Millstone, High Point
Tchibo Eduscho
Source: Ponte 2001, p.17.

Kraft and Douwe Egberts are amongst a number of roasters active in Vietnam, sourcing and
training producers and processors in their quality requirements. This has given Viet Nam
valuable experience in what TNCs desire from their coffee producers. However, a number of
these programs work with just a few growers and government agencies and exporters.

The profits on the global instant and roasted coffee markets have continued to rise
astronomically. However, the producers share in this US$43 billion market has shown a
substantial decline over the last 20 years as International Coffee Agreements have faltered
and producers control over prices has been transferred to transnational roasters and
traders. Between 1980/81 and 1988/89, coffee-producing countries managed to retain 20%
of the price of coffee, with 55% going to consuming countries. The proportion of income
retained by producers between 1989/90 and 1994/95 fell to 13%, with consuming countries
retaining 78%. 7 At the grassroots level, according to rough calculations, Vietnamese farmers
receive just 35.64 cents/kg of coffee sold, compared to a selling price for instant coffee in the
US of US$16/kg.

2.3 Coffee production in Dak Lak province

2.3.1 Society, economy, and environment

The total population of Dak Lak is nearly 1.8 million people, accounting for 58% of the
population of the four provinces in the Central Highlands. Dak Lak's ethnic minority
population is 0.36 million, of which the E De make up 64.5% (18.4% of the provincial

7
Ponte, 2001, p.15.

11
population) and the M'nong 17% (4.8% of the provincial population). Dak Lak's population
growth rate is the country's highest at 6.18%/year.

Dak Lak, with its large area and thinly dispersed population, possesses many favourable
conditions for the development of agro-forestry, particularly specialised agricultural
production areas. It is located in a tropical region with adequate moisture, temperature and
light for the growth of many kinds of crops. In the dry season, Dak Lak's weather is not very
cold, with enough sunlight for planting many crops and drying many agricultural products.
Having two separate seasons facilitates crop growth. With most of its basal soil having
advantageous qualities such as a fine texture, a high water absorption level, and high
fertility, Dak Lak is well-suited for the development of various industrial crops including
coffee, rubber, pepper, and cashew, as well as short-term crops such as hybrid maize and
cotton. 8

After Viet Nam's reunification in 1975, the state implemented important policies to build Dak
Lak into a New Economic Zone (NEZ) by (a) creating hundreds of agro-forestry state farms
and co-operatives, (b) moving a large number of people from the densely populated
lowlands to the mountainous areas, and (c) encouraging people to reside on state farms and
co-operatives. Along with the implementation of reforms since 1986, Dak Lak has achieved
much, including rapid economic growth: its per capita GDP jumped from US$204 in 1990 to
US$390 in 2000. The structure of agriculture and animal husbandry has been transformed in
the province, with an increase in the planting of industrial crops such as coffee and pepper
for export.

2.3.2 An increase in coffee production

The abrupt increase in the world coffee price in 1994 along with a reduced global coffee
supply resulted in an increase in Viet Nam's coffee export price, bringing increased benefits
from coffee production in comparison to the production of other crops. Quickly responding to
price signals, farmers in Dak Lak substituted production of coffee for that of other crops.

Figure 10 Coffee-growing area by region Figure 11 Coffee output by region

Dak Lak Northeast +
Dak Lak Northeast +
50% Northwest
53% Northwest
1%
0%
North +
North +
South
Central
South
Coast Central
3% Coast
1%
Central Central
Highlands Highlands
Southeast (excluding
Southeast (excluding
Region Dak Lak)
Region Dak Lak)
34% 12%
33% 13%

Source: GSO and Customs Department.

In the 1990-2000 period, the coffee plantation area in the province expanded greatly, by
about 14.1%/year. In Dak Lak in 2000, the income sources of large households were quite
varied, including coffee, pepper, cashew and sugarcane. 9 By the year 2000, the coffee
plantation area in Dak Lak had reached 260,000 ha, of which 88.40% was on basal soil
(223.34 thousand ha), and 11.60% on other kinds of soil. Coffee now accounts for 57.43% of
agricultural land in Dak Lak and 86.24% of the perennial industrial crops area in the

8
Phan Quoc Sung, 1995, pp.10-14.
9
Nguyn Vn ng, May 2000.

12
province, and Dak Lak has become one of the biggest coffee-specialised regions in the
country, accounting for 50% of total area and 53% of national output (see Figures 9 and 10).

However, the increase in coffee production in Dak Lak has Table 2 Increasing yield, area
been extensive rather than intensive (see Table 2). In the and output of Dak Lak coffee,
1990-2000 period, coffee output growth was 30.4%/year, 1990-2000
of which two-thirds was due only to expansion of the area % increase
being planted to coffee. Yield 7.0
Harvested area 23.4
The average coffee yield in Dak Lak is about 2.45 tons/ha. Output 30.4
However, as this study concentrated on poor households Source: ICARD.
with limited ability to access and apply coffee production
technology, the average coffee yield revealed in the quantitative survey is lower than the
average yield for the province as a whole. Most of the surveyed households use seedlings to
plant coffee, which is a low-yield method, while shade trees are planted but are generally too
short to shade all the coffee trees. There is no significant difference in coffee yield among
household groups in the same district, but there is a large gap amongst different districts
(1.9 tons/ha in Cu Mgar versus 1.6 tons/ha in Buon Don and just 1.1 tons/ha in Lak).

The fall in the export price of coffee has led to a reduction in the farm gate price, which hit a
record low in the last two years. In Dak Lak, the price of dry coffee bean type RI 10 fell from
VND 11,500/kg in January 2000 to VND 9,100/kg in July 2000, and further to VND 4,000-
4,500/kg in the first two weeks of December 2000, an overall reduction of 62%. Compared to
January 1999s level of VND 20,500-21,000/kg, the coffee price fell by 80%. 11 (Fresh coffee
prices and dried coffee prices are equal to one-fifth and one-half of the coffee bean price,
respectively; see Table 14). With coffee prices fluctuating, export companies are not willing
to store as much coffee as they had previously, further reducing demand.

2.3.3 Production costs

Production costs are dominated by Table 3 Average production costs and DRC index for
fertiliser. The amount of fertiliser Dak Lak coffee, 1994-1999
used by coffee farmers increases Production costs
Productivity DRC
according to the age of the plant and District (VND/kg of coffee
(ton/ha) index
also depends on farmers' incomes beans)
and the coffee price. Production Cu Mgar 8,820.9 1.9 0.300
costs also include pesticides and Buon Don 8,649.4 1.6 0.325
irrigation, and depend on the quality Lak 6,982.6 1.1 0.628
of land, amount of water available, Source: In-depth quantitative survey, Dak Lak, March 2002
and cultivation practices, among
other factors. During high-price periods, with coffee the main income source, all coffee
producers are encouraged to invest strongly in new plantations and maintenance of current
plantations, though farmers in districts such as Cu Mgar which are well-suited for coffee-
growing invest more and gain higher productivity than do farmers in Buon Don and Lak. On
average, coffee bean production costs are VND 8,820.9/kg in Cu Mgar, VND 8,649.4/kg in
Buon Don and VND 6,982.9/kg in Lak (see Table 3), while the selling price, already low for
several years, dipped to VND 4,000/kg, or just half the cost of production, in early 2002. 12

The comparative advantage for coffee production of the surveyed districts, as measured by
the Domestic Resource Cost (DRC) index, varies widely. The DRC index ranges from 0 to 1.
The closer it is to 0 for a given region and product, the higher the potential added value of
the product in that regionin other words, the greater the district's comparative advantage

10
Coffee export enterprises sort beans by size, weight, and colour into three grades: R1, R2 and R3.
11
ICARD figures.
12
Figures calculated from survey.

13
for the product. The DRC for coffee is 0.3 in Cu Mgar and 0.325 in Buon Don, but double
this in Lak0.628. Lak's higher DRC index reflects the fact that its relatively lower coffee
production costs are not enough to make up for its unfavourable land and water conditions.

2.3.4 Processing and export of Dak Lak coffee

Figure 12 Coffee processing
Fresh berries

Wet processing Dry processing

Collecting beans from mature berries Collecting beans from mature berries)

Categorising according to size Drying coffee beans

Cleaning

Categorising freshly cleaned coffee by weight

Soaking to ferment

Cleaning

Rinsing

Drying

Dried coffee Dried coffee

Removing extraneous matter

Cleaning

Polishing coffee beans

Categorising (size, weight, colour)

Finished coffee beans

Coffee powder

The number of households processing coffee themselves is relatively low. None of the
coffee-producing households in Lak process coffee themselves. Those households in Cu
Mgar and Buon Don which process coffee mainly utilise the dry processing method. This
method is very simple, with only one main stage of drying the fresh berries under the sun
and then removing the husks using a hulling machine to produce the green coffee beans.
This method has a low production cost (about VND 100,000/ton) but produces an unstable

14
and generally low-quality product, because the longer the coffee is dried under sun, the
worse its taste. Another factor reducing quality is that the longer the rainy season lasts, the
higher the "black nut ratio" or prevalence of fermented nuts. Export enterprises usually need
to reprocess this coffee at an estimated cost of VND 48,000/ton.

Most households sell their dry-processed coffee to private middlemen, who use either "kong
nong (small locally-made tractors) or lorries to transport it. On average, the cost of
transportation by kong nong is lower than by lorry, and the latter can only be used on better-
quality transport routes. Off-road routes increase transportation costs in other ways, though,
especially in the rainy season. Around 44% of surveyed enterprises revealed that bad roads
are their biggest problem, and 12.5% gave bad roads as their reason for using smaller and
simpler transportation means. Bad roads are the main reason that transportation for coffee
purchasing is more expensive (at VND 1,750/ton/km) than for selling coffee to export
companies (at VND 1,625/ton/km).

Figure 13 The coffee chain in Dak Lak 2001: from producers to exporters

Private
assemblers'
products include
93% coffee beans
Domestic market
(VND 2,587/ kg)
uses coffee powder

6%
Coffee 100% (VND 30,000/kg)
growers' Export FOB at
(VND 4,192/kg) (VND 5,784/kg)
products Saigon port
include fresh 99.9%
coffee, dried

World market: categorise

7% coffee beans into R1, R2
(VND 2,587/kg) and R3
Direct processing/ 94%
exporting
(VND 5,784/kg) 0.1% Export at GIF price
enterprises
categorise coffee
beans

Source: Commodity chain survey, Dak Lak, March 2002.

Coffee export enterprises purchase, re-process and sort coffee beans by size, weight and
colour into three grades: R1 (accounting for 44.5% of their beans), R2 (50.7%) and R3
(4.8%). (Some foreign customers do not buy coffee that has been sorted into the three
grades, preferring to purchase coffee in one mixed category and then reprocess it after
importation.) A small proportion of these coffee beans (about 3-6%) is then processed into
coffee powder by private enterprises for domestic consumption. Dak Lak processing
companies mainly use the dry processing method, at a cost of about VND 148,200/ton.
Some enterprises still utilise processing technologies from the French colonial period, but
generally only for reprocessing and resorting.

Table 4 Coffee transportation costs, 2001

Transportation Step in the commodity Average distance Unit cost Total cost
means chain (km) (VND/ton/km) (VND/ton)
Auto Purchasing coffee 14 2,000 28,000
Kong Nong Purchasing coffee 8 1,500 12,000
Auto Selling to export enterprises 22 1,625 35,750
Auto Exporting via Sai Gon Port 350 1,500 52,500
Source: Commodity chain survey, Dak Lak, March 2002.

15
Transportation costs from Dak Lak to Sai Gon Port (a distance of 350 km) are on average
VND 1,500/ton/km, including accommodation fees for drivers and other informal costs (see
Table 4). Around 94% of Dak Lak's coffee beans are exported through this port.

The present system of pricing does not give adequate incentives to households and private
businesses to improve the quality of beans for export. Exporters do not pass on market
information or price differentials to middlemen. This situation differs with wet processing
(Figure 13), 13 used by only two companies in Dak Lak. This method produces higher-quality
coffee with a higher value, thus helping stabilise export channels, but requires a higher
investment (about VND 670,000/ton) as well as waste treatment measures to prevent
pollution. 14 Moreover, coffee beans for wet processing must be of a similar size, colour, and
weight. Export companies using wet processing methods buy fresh coffee directly from
coffee producers who must ensure that their production activities meet exporters' technical
requirements (for example, the ratio of mature berries must be 90%, activities such as
watering, fertilising and harvesting must follow company requirements, and so on). Wet
processing capacity facilitates co-operation among farmers in co-operatives and
autonomous communities because it requires activities such as crop maintenance or
harvesting to follow similar techniques and timing. In general, the export price for wet
processed coffee is US$100/ton higher than that for dry processed coffee, while the farm
gate price for wet processing is also VND 400-600/kg higher than that for dry processing, but
the export price changes daily according to market signals, as does the farm gate price.

However, coffee berries for wet processing are only produced in areas where companies
with wet processing chains have made investments. The main reason is that wet processing
technology requires a large amount of capital.

Figure 14 The wet processing coffee chain in Dak Lak

Price difference in each
transaction: 50-100 VND/kg

Sell fresh coffee or Small

dried beans, or private
buyers
repay debt
Primarily process, Buy dried coffee beans
categorise

Households Export To HCM City

Commune District
agents agents company (dry
processing)

Grow and harvest

Export markets
according to Build coffee-growing Invest in
company zones, joint-venture processing
requirements technology
Farm gate price is Export To HCM City
400-600 VND/kg company (wet
higher processing) Wet processed coffee
export price is
Buy fresh berries US$100/ton higher
Source: Quantitative research, Dak Lak, March 2002.

13
MARD has proposed that the government provide some incentives for enterprises to invest in wet processing
technology at a preferential interest rate of 3%.
14
Nguyn Quang Th, 1999.

16
 Chapter 3 Stakeholders in the local coffee market
3.1 Households in the survey area

Table 5 summarises the characteristics of households in the surveyed communes divided

into groups according to wellbeing. Characteristics were identified by communes and
villages, rather than being taken from official surveys or pre-determined, and then cross-
checked in interviews with households and focus group discussions with women.

Table 5 Comparison of wellbeing ranking characteristics by district

Household Cu Mgar district Buon Don district Lak district
group (Ea Pok commune) (Ea Nuol commune) ( Dak Phoi commune)
Rich Concrete house Concrete house Concrete house
households Motorbike, tractors, water Tractors, water pumps Tractors; television
pumps
1-3 ha of coffee; have Have land of 1-3 ha; 1 ha land; have many
planted coffee for a number favourable land (good soil, fields
of years near water source)
Hire labourers Have workforce 3-5 labourers
Have funds; access to loans; Have funds Have pension; have
some have special income accumulated wealth in
sources (from relatives high coffee price periods
overseas) Know how to invest
Know how to take care of Received and applied
coffee; have access to technological inputs on
information plantations Children graduated from
Children have high Children have high 7th or 8th class
educational level educational level/have not
quit school 3-4 cattle; 1-2 pigs
Cattle; some have fish
ponds/VAC Trading
Trading Enough food
Enough food
Have high educational level Still keep coffee plants
Crop diversification
Medium Small concrete house Good house with cattle Some raise 1-2 pigs
households Motorbikes, water pumps Tractors Some had a television
(but sold already)
15
7-8 sao of coffee; 1 ha of 1-2 ha land 3 sao or 1 ha of land,
land; less land less flat land; less coffee
Many children; fewer
Newly set-up family No/fewer labourers; many than 3 labourers
children; some sick people Debt; earn a salary
No funds No funds Do agricultural
Less access to information Have poor production production activities
techniques
Lack food for 2 months Lack food for 3 months
Have funds to bring children
to school; some children quit
school
Poor Unfertile soil, low coffee Recently separated from Less land, under 3-4
households productivity; less than 4-5 parents with no land; less sao; plant less coffee,
coffee sao; less than 1 ha land (5 sao-1 ha), low quality many trees don't grow;
land soil; hire land (VND 100- less water paddy area
120,000/sao) (about 0.5-1.5 sao)
Many children Many children; Many children; newly
disability/illness; newly married
married; old, less labour
Temporary house No house/temporary and Low-roofed house
small house
No water pump; some have Only simple production tools No television

15
1 sao = 1000 m2

17
 Household Cu Mgar district
group (Ea Pok commune)
television; some have
motorbike
Very hungry for several
meals/month; some are very
hungry right before
harvesting
Not provided with short-term
loans, must borrow
unofficially; no funds for
investment
High ratio of children quitting
school
Extremely Newly married, or recently
poor separated from parents;
households single; many children;
perennial illness
Low-roofed house
Less coffee area, low quality
soil; no or less land
Nobody instructs them in
working ways
Unable to borrow money
No motorbike; no working
tools
Children stay at home
No rice for 1-2 months
Source: Qualitative survey, Dak Lak, March 2002.
Buon Don district
(Ea Nuol commune)
Lack food for 4 months
Poor ability to apply
technologies; do not know
how to invest even if have
capital
Widow, many children;
single; newly separated from
parents
Low-roofed house
Less land (under 5 sao);
some just bought coffee land
when price reduced
Poor technology
application/don't want to
apply
No funds
No assets
Some still bring children to
school (mainly primary
schools)
Lazy
Lak district
( Dak Phoi commune)
Very hungry for 6 months
Don't raise animals
Fewer labourers; many
small children; disabled
Cottage
Less coffee area; less
land, less than 2-3 sao of
unfertile land; plant less
coffee; unirrigated land
No knowledge on
technological advances
No funds
No television
Very hungry for 9 months
Don't raise animals

In general, poor or hungry households in A low-roofed house is typical of the poor

Dak Lak may: (a) have scarce or poor- in Cu Mgar district
quality land, (b) have many small
children, meaning less available labour,
(c) have relatives who have been sick
for a long time, (d) be newly established
as households (and consequently have
less savings), (e) be unable to earn a
living (with limited ability to apply new
technology), or (f) be female-headed.
These households often have temporary
or low-roofed cottages and low-value
assets (no televisions, motorbikes,
tractors or water pumps). They do not raise pigs or cattle, and may have many children who
have been forced to leave school early (most of their children will only graduate from primary
school). They often work for others to earn their living. All these factors mean they have less
access to bank loans. The characteristics of poor and hungry ethnic minority people in Dak
Lak are not very different from those of other poor people throughout the country as
described in numerous reports.

18
3.2 Coffee-growing households

Households which produce coffee on a small scale (about 1 ha per household) comprise the
majority of coffee-growing households in Dak Lak. These households, including both Kinh
and ethnic minority people, respond to market signals in making their production decisions.
Until recently, high coffee prices encouraged them to expand their production area by
reclaiming wasteland and cutting down forest land. Family is their main source of labour,
while their capital is obtained through bank loans and other sources. In favourable areas
(with good soil, flat land, a stable water source, favourable transportation conditions, and so
on) and in specialised coffee-growing regions, coffee is the main income source, so the
households in this group allocate most of their resources to planting coffee. In less
favourable areas, agricultural production is more diversified with a lower level of investment
and less intensive coffee production.

Households which produce coffee under contract with state farms and companies comprise
10-15% of all coffee-producing households in the province. These households enjoy a
number of benefits under their contracts but also have obligations. They usually receive a
certain amount of in-kind support such as fertiliser, seedlings, and irrigation; some
households receive a monthly salary. However, they have to use their own labour, and may
have to invest in more fertiliser or other inputs than are provided by the contractor.

Finally, there are thousands of households in the province which produce coffee on a large
scale, at least several hecta. Since the research team concentrated on the poor, this group
was not analysed in depth.

Except for households contracted to state farms, almost all coffee-producing households sell
their produce to local private middlemen. These households get no support from the
government and are not involved in contracts to sell their coffee to processing and exporting
companies.

3.3 Ethnic minority women

Unlike the Kinh, ethnic minority people in Dak Lak (i.e., the E De, MNong, and other ethnic
minority groups) follow a matriarchal system. The typical work division between husband
and wife is summarised in Table 6.

Ethnic minority women do almost all the housework, including strenuous work such as
chopping and carrying wood. Most other heavy work, and most coffee plantation work, is
done by men, though women help their husbands when needed. Children's work follows an
informal split with sons helping fathers and daughters assisting mothers. Widows or
women with sick husbands have to do all the work themselves, including such tasks as
pesticide spraying.

Decisions to buy production and household materials and sell coffee are based on
agreements between husband and wife. If the wife does not agree, the husband will not act
alone, showing that the wife is not only the money keeper. However, gender equality
remains very hard to attain, even in matriarchal communities. Although women play an
important decision-making role when dealing with family assets, most important decisions
requiring technical knowledge, such as cutting back coffee trees, diversifying crops or
borrowing money, are the responsibility of men. The main reason for this, according to
ethnic minority women, is that husbands know more than wives do, because husbands
have a higher educational level and can grasp more information. The red book of land
certification is registered under the name of the man (men are still considered to be the
household heads), generating contradictions: inequality in land control between men and

19
women is enshrined in these books, but according to the matriarchal system, ethnic minority
women are the main inheritors in the family.

Table 6 Gender divisions in work and decision-making in ethnic minority families

Activity Wife Husband
Housework
Cooking, washing
Taking care of children
Chopping/carrying firewood, carrying water
Coffee plantation work
Digging holes Helps husband
Planting coffee seedlings
Weeding Helps husband
Fertilising Helps husband
Watering
Spraying pesticides
Making brooms, breaking off dried
branches, cleaning coffee gardens
Harvesting coffee
Transporting, loading
Protecting products Some
Drying coffee
Other work
Fishing
Harvesting vegetables and young bamboo
Working for others
Decision-making
Purchasing materials
Selling coffee
Buying assets, machines
Cutting down coffee trees
Planting other crops
Borrowing from banks Don't know
Borrowing from others
Source: Discussions with women's groups in Ea Sut and Lang villages, Ea Pok
commune, Cu Mgar district, March 2002.

Women also suffer in education, where in case families lack money for sending children to
school, girls must be the first to stay at home to help with the housework. There were
almost no ethnic minority women leaders in the survey areas, except for Womens Union
officials (only men hold the position of village head and take part in commune leadership).
The reasons as perceived by the ethnic minority women themselves are that they are low-
educated, and they are very busy with housework. One encouraging sign is that there have
been some ethnic minority women working as primary school teachers recently.

3.4 Private middlemen and coffee export businesses

Private middlemen purchase over 90% of farmers' coffee. Big communes generally have a
group of middlemen who purchase coffee from households. Price differences between
various middlemen are about VND 50-100/kg; the middlemen gain their margins mainly from
primary processing (removing extraneous matter, rubbing and polishing) and sorting. The
key task of the middlemen, however, is transportation of coffee from producers to
processing/exporting enterprises. Neither households nor middlemen use wet processing

20
methods because of the high costs involved. Many private middlemen (over one-third of
surveyed firms) have received loans from banks, at an average of VND 600 million.

Coffee export businesses have established networks with many district agents and some
affiliated middlemen; district agents have their own networks in coffee-producing communes.
Once contracts are signed with foreign customers, these businesses will often pay 80-90%,
or even 100%, in advance for agents to purchase coffee (without payment in advance,
agents might not abide by contracts should prices change).

21
 Chapter 4 The impact of coffee production and trade on Dak Lak
4.1 The impact on livelihoods

4.1.1 Changing living standards

High coffee prices from 1995 to 1999 helped to reduce poverty in the coffee-growing regions
of the surveyed districts of Dak Lak. 16 Local people purchased many assets during this
period. On average, about 70% of surveyed households now own bicycles, 45% television
sets, and 25% motorbikes and "tricycles" or tractors (see Table 7).

Table 7 Ownership of various assets by district (%)

District
Assets Total
Cu Mgar Buon Don Lak
Electricity 99.1 99.7 98.7 98.8
Bicycle 69.0 71.9 75.8 57.5
Radio 54.3 70.0 72.6 37.1
Television 45.9 47.3 42.5 48.3
Motorbike 25.8 27.8 24.0 25.5
Tractor 25.0 22.4 30.8 21.2
Water pump 24.2 24.3 28.6 18.9
Source: Broad-based quantitative survey, Dak Lak, March 2002.

However, the decline in coffee prices since this period has to some extent reversed this
trend. As concluded by one farmer, the rich have become medium-off people, the medium-
off the poor, and the poor have fallen into hunger... On average, 45% of coffee-growing
households now lack adequate nourishing food, including rice, 66% have bank debts, and
45% have members who have turned to selling their labour to earn money (see Table 8).
However, the impact of declining coffee prices is different among different types of
households (see section 4.2).

Table 8 Difficulties of households by district (%)

District
Difficulty Total
Cu Mgar Buon Don Lak
Have debt from bank 66.0 78.6 68.0 48.3
Work as hired labourers 45.7 38.5 47.9 51.9
Lack food 45.0 36.0 36.6 65.9
Have debt from traders or middlemen 6.6 0.0 11.0 9.5
Have debt from mass organisations
(Women's Union, Farmers' Union) 4.8 8.5 1.6 4.2
Source: Broad-based quantitative survey, Dak Lak, March 2002.

4.1.2 Increasing population density

Coffee production requires a large amount of labour, as much as 240-250 person-days/ha.

High coffee prices and subsequent coffee farm expansion opened an active labour market in
coffee-growing areas, and led to a local labour shortage, especially during the harvest.
Responding to market signals, tens of thousand of labourers moved from different regions
(including northern ethnic minority areas) to the Central Highlands. The number of migrants
peaked in the early 1990s, dropping slightly when local authorities implemented some

16
A survey of poor households showed that according to the old criteria of Department of Labour, Invalids and
Social Affairs of Dak Lak Province, the poverty incidence in 2000 decreased greatly compared to the previous
year, falling to only 8.69%, but according to the new government criteria, the incidence actually rose to 25.55%.

22
measures to restrict free migration and when coffee production levels declined (see Figure
15).

Figure 15 Migration to Dak Lak, 1976-2000

200 ,00 0

p la n n e d m ig ra tio n
fre e m ig ra tio n
Number of people ` 160 ,00 0

120 ,00 0

80 ,00 0

40 ,00 0

0
1 976 -80 19 81-8 5 1 986 -90 Y ear 19 91-9 5 1 995 -99 200 0

Source: Resettlement Committee of Dak Lak, 2000.

Massive migration waves have changed the population structure of Dak Lak. The population
density increased from 17 people/km2 in 1975 to 61 people/km2 in 1995 and is presently
around 94 people/km2.

4.1.3 Food insecurity

Coffee-producing households remember that when coffee prices were high, one kg of coffee
beans could be exchanged for five or more kg of rice; there were no worries about food then,
since "the higher the income, the stronger the consumption." Since coffee prices began to
decline, the in-kind value of one kg of coffee beans has dropped to just over one kg of rice,
and coffee farmers have begun to face food insecurity. The problem is even more serious for
people who have not been able to save, including many ethnic minority people.

Households have tried to deal with food insecurity in a variety of ways. Some have reduced
the number of meals they eat in a day. Others have changed the types of food they eat,
eating rice porridge or supplementing food with cassava and maize, strategies that are
particularly common in coffee monoculture areas. Some have benefited from the support of
local authorities, who since the end of 2001 have been providing occasional food donations.
Households have also given a higher priority to rice and other crops, yet very limited paddy
land and inadequate irrigation means only one crop per year can be harvested in many
places. Ethnic minority people are particularly at risk as they do not have the custom of wet
paddy cultivation.

Table 9 Differences between food-shortage and food-sufficient households

Average debt
Average Average debt
(borrowing % of households
Household type land area (all households)
households only) hiring their labour
(ha) (VND million)
(VND million)
Food-shortage
1.06 1.10 1.69 73.9
households
Food-sufficient
1.55 2.42 3.02 22.7
households
Source: Broad-based quantitative survey, Dak Lak, March 2002.

4.1.4 Reduced school attendance

23
The educational level of people in the surveyed areas is low. Each village has only a few
residents who are high school graduates. However, local people still value education highly.
As a poor father in Lang village, Ea Pok commune, Cu Mgar district, said, Even though I am
poor, I still encourage my children to go to school because I know I am ignorant.

The large reduction in household incomes due to low coffee prices in recent years has
forced many children of medium-off and poor households to quit school, particularly
secondary school students. Parents who are able, continue to send their children to school,
but say that if prices and incomes continue to decline, they may be forced to pull their
children out of school.

In public schools, the children of poor households and ethnic minority children are exempt
from tuition fees and school contribution fees. Despite this, school attendance has a high
cost for large, poor families. Clothing and shoes are expensive. In "semi-public" schools
such as the one in Ea Pok commune, Cu Mgar district, costs are even higher as families do
have to pay fees of on average VND50,000/month/child. The need for children's labour to
generate more income also increases the (opportunity) cost of school attendance.

Box 1 No money for shoes 17

Ms A is an E De widow in Lang village, Ea Pok commune, Cu Mgar district. Her family is one of the
poorest in the village. She has nine children. The highest education level they have reached is 4th
class. She plants only coffee on 2 sao of garden land and 2 sao of fields far from a water source. Her
home life is very difficult; the family eats rice with sweet potato and cassava. Recently, knowing her
situation, some farmers hired six of her children, but the pay is low: just 1 bag of rice, equivalent to
45 kg, instead of money. She does not know what to do, and does not have money to invest in
diversifying her income or even for the cutting down of her coffee trees. In addition, planting crops on
her land is very hard.

Ms A's youngest child, who is 14 years old, was until recently studying in the 5th class. But Ms A
revealed that her family is so poor that she does not have money to buy shoes for him to go to school,
and he was ashamed in front of his friends so he quit school. Her household is registered as a poor
household, so her children are exempt from tuition fees, but the difficulty is that she does not even
have enough money to buy other necessities such as shoes for her children. She really wants to be
supported to enable her youngest child to go back to school.

4.1.5 Changing income sources

Of the surveyed districts, Cu Mgar has the highest revenue from coffee, Buon Don is next,
and Lak is last. Richer households in more favourable coffee-growing areas such as Cu
Mgar get a higher percentage of their total incomes from coffee, while richer households in
regions less favourable to coffee growing, such as Lak, have more diverse sources of
income (see Table 10). But even poor ethnic minority coffee producers have moved away
from subsistence farming, because coffee revenue was until recently enough to pay for food,
material goods, and other necessary expenditures.

Despite the past three years of low and declining coffee prices, richer households still retain
their coffee plantations because they have made such a substantial investment in them. On
the other hand, poor families now face hardship whether or not they retain their coffee trees.
Lower coffee prices have also seriously reduced farmers' savings, especially for the poor.
Most people have had to sell assets such as animals to continue investing in and
maintaining their coffee plantations. And rich or poor, all coffee-producing households have
had to begin to prioritise other crops and income sources, such as hybrid maize, cotton,
paddy and livestock.

17
Source for all text box information is the qualitative research, Dak Lak, March 2002, unless otherwise noted.

24
 Table 10 Income from coffee and as a percentage of total household income by district and
household type, 2001 (VND million)
Cu Mgar Buon Don Lak
Household type
Revenue % Revenue % Revenue %
Rich 19.456 83.1 15.663 40.5 1.434 9.2
Medium-off 11.700 64.5 7.223 35.9 1.634 31.2
Poor 7.764 45.2 4.314 28.9 0.694 18.1
Very hungry 2.324 71.4 2.677 29.0 0.534 13.4
Source: In-depth quantitative survey, Dak Lak, March 2002, and ICARD.

However, land for the cultivation of other crops in regions favourable for coffee-growing is
very limited, especially paddy land: most households only reserve 1 sao for paddy cultivation
(see Table 11). The result is highly undiversified Weaving baskets to make money for rice is
incomes from agriculture. There are an an escape for the M'nong gar people of Dak
increasingly large number of people working as Phi, Lak district, when coffee prices fall
hired labourers, and stable income sources
such as a salary, pension, annual state support
or income from other work such as weaving
have become even more important for many
people, particularly the poor. Ironically, as hired
labour has become a more important income
source, demand for it has decreased. People
who work for coffee producers weeding,
trimming branches, digging beds, watering,
fertilising and harvesting, have seen their wages
reduced by 25% as a result of low coffee prices,
from VND 20,000/day in previous years to only
VND 15,000/day currently.

Table 11 Agricultural land use by district (ha/household)

Land use
District Average land area Inter-cropped
Coffee Non-rice crops
rice 18
Cu Mgar 1.46 1.05 0.38 0.03
Buon Don 1.58 0.58 0.73 0.27
Lak 0.87 0.29 0.40 0.18
Source: Broad-based quantitative survey, Dak Lak, March 2002.

Table 12 Other income sources of coffee producers

Importance to
household
Income source Characteristics
income as coffee
price drops
Maize Rapidly increasing Easy to plant
Mainly hybrid maize
Rather high income (only less than cotton)
Makes full use of land, intercropping with upland
paddy and coffee
Lease land to plant
Increasingly cut down coffee trees to plant
Cotton Rapidly increasing Welcomed by farmers (first crop maize, second
crop cotton)
Easy to plant, but needs labour and dependent on
good weather

18
Paddy area includes both water paddy and upland rice fields; water paddy area per household is very small
(about 1 sao). Ethnic minority people often intercrop upland rice with other crops such as maize or beans.

25
 Importance to
household
Income source Characteristics
income as coffee
price drops
Generates a rather high income (higher than
legumes and hybrid maize)
Cotton companies purchase products at agreed
prices, and make available seed varieties, fertiliser
and technical advice and instruction
Hired labouring Rapidly increasing Much more work as hired labourers
(harvesting, But unstable, less opportunity
weeding, digging Lower salary (from VND 20,000 formerly to VND
beds, fertilising and 15,000 currently).
trimming coffee
Regularly exchange labour
branches)
Livestock (cattle, Increasing This is the dream of most of the poor because it is
pigs, chickens) a valuable asset in times of hardship
Requires a large investment
Pigs are easily infected with disease
Re-harvesting the Increasing Low income
remaining coffee
after the principal
coffee harvest
Cutting wood from Increasing Low income
the forest,
harvesting forestry
products
Paddy Slowly increasing Some have less water paddy area (1
sao/household), mainly upland rice
Suffer from drought or poor irrigation (positioned at
the tail-end of irrigation systems)
Increasingly use new varieties (in some difficult
areas, seeds are provided by the state)
Legumes Slowly increasing Easy to plant, but easily spoiled in bad weather
Low income (lower than cotton and hybrid maize)
Makes full use of land, intercropping with upland
paddy, hybrid maize and coffee
Fruit trees Slowly increasing Takes time to harvest
Unstable price
Staff salary, Unchanged This is an important regular income, ensuring
pension, state "enough food" even in case of coffee loss
support
Weaving baskets Unchanged This is an important income source, ensuring
"enough food for some M'nong gar ethnic minority
people" (Dak Phoi commune, Lak district)
Cashew, pepper Unchanged Catches disease easily (pepper), low yields
(cashew)
Lower price
Cocoa - Takes time to harvest, big investment
Needs guarantee for sales outlet
Source: Qualitative survey, Dak Lak, March 2002.

26
4.1.6 Indebtedness

When coffee prices were as high as VND 10,000/kg, banks provided large loans for
investment in coffee: one household received a loan of about VND 15 million for 1 ha of
coffee with a yield of 2-3 tons/ha. The Buon Don district branch of the Viet Nam Bank for
Agriculture and Rural Development (VBARD) even expanded its sub-branches down to the
commune level to serve farmers. When coffee prices declined, the bank implemented
policies to suspend or roll over loans. As a result, the present debt portfolio of these rural
banks is very high, and farmers are unsure whether they have to pay interest on their
suspended loanssomething they feel is beyond their means.

Box 2 Banks are also in trouble

The amount of self-mobilised funds of district banks is very limited, while the amount of bad loans to
coffee farmers is high. The Buon Don district branch of the Viet Nam Bank for Agriculture and Rural
Development has a total non-performing loan portfolio of about VND 58 billion, of which 70% had
been lent to coffee-growing households. In the period of high coffee prices, every morning about 70-
80 people used to come to the bank to pay interest. Now, although there is a regulation stating,
during times of suspended loans, people with additional incomes still have to repay their original
loans plus interest, repayment is difficult for farmers who have very little spare income. Meanwhile,
district bank branches remain almost completely reliant upon funds from central and regional banks,
which are limited. Smaller commune and district branches are generally inactive with little hope of
operating sustainably in the near future.

This bank branch has been unable to implement the policy of continuing to provide loans to farmers to
maintain and intensify their coffee production, due to required administrative involvement in every
decision: all loans must wait for relevant authorities' approval regarding the suitability of land in the
borrower's area, but no authority has conducted the approvals to date. Banks are waiting for official
approvals from the province to resume lending, as well as to manage the coffee land which has been
provided to them as collateralvery difficult to do when people continue to cut down the coffee trees.

Current coffee prices cannot cover production costs. In October 2001, Dak Lak's coffee
output was about 450,000 tons, the highest ever, but a price of VND 5,000/kg only covered
about 60% of production costs (approximately VND 8,000/kg). In fact, right before the lunar
New Year in early 2002, the coffee price fell to just VND 4,000/kg. In March 2002, the price
increased slightly, but was still too low to cover costs at just VND 6-7,000/kg. Low prices
caused losses for coffee producers and traders in Dak Lak of VND 1,400 billion,
discouraging people from further investing in coffee, and leading farmers to destroy several
thousand ha of coffee plantation area in order to grow other crops. Meanwhile, farmers face
indebtedness as it is difficult to repay loans borrowed in better times for expansion of coffee
production.

Over 60% of surveyed Table 13 Debt by household type and source (VND
households now have debts million)
with banks, other Private Friends, Total
Household Banks
organisations, or individuals, organisations relatives debt
averaging about VND 11.6 Rich 3 4.9 3.3 11.2
million (rich and medium-off Medium-off 8.2 1.2 2.6 12
households), VND 6.5 million Poor 2.9 2.5 1.1 6.5
(poor households), and VND Very hungry 4.9 0.8 0.1 5.8
Source: In-depth quantitative survey, Dak Lak, March 2002, and ICARD.
5.8 million (hungry Note: Only indebted households were included in this table.
households) 19 (see Table
13). 20 The debt burden of the average poor household surveyed is three times its average
2001 income.

19
Household groups used are those identified in the survey wealth ranking exercises.
20
Broad-based survey data on all households (both those with and without debts) gave an average debt amount
of VND 2.1 million in Cu Mgar, VND 2.4 million in Buon Don, and VND 0.8 million in Lak.

27
Nearly 90% of the poor have not found ways to repay their debts, hoping instead for
preferential credit policies from the Government. While most surveyed are in fact already
eligible for suspension of debt and loan rollover, some still fear they will have to sell their
land to repay their debts. One problem is that some poor households do not use their loans
for production purposes (instead for house building, for example; see Box 3), leaving them
with no revenue from which to make loan payments. Some farmers also face difficulties in
paying agricultural taxes, though if they want to borrow more, some banks require them to
pay their taxes. 21

Box 3 Using a loan for a non-productive purpose makes repayment difficult

Mrs B's is a poor Mnong family in Ye Yuk village, Dak Phoi commune, Lak district. The couple has
three little children and 2 sao of coffee trees. Without applying fertiliser, last year they harvested only
100 kg of dry coffee beans, all of which they sold, earning just VND 200,000. This year they have not
watered their coffee trees at all because they have no money to hire a water pump (one period of
watering their trees takes 4 hours at a cost of VND 15,000/hour). They also have 4 sao of dry land for
rice and subsidiary crops. They are short of rice from March to September every year. Mrs B's
husband has to sell his labour to other families and weave papooses for money to buy rice.

Last year Mrs B got a preferential loan of VND 2 million from the Women Union's fund. She spent all
of it on roof sheets to prepare to erect her house. The core problem is that the money has been spent
to buy the roof sheets while they do not have enough rice. How can she repay the loan?

Some middlemen firms have gone bankrupt, having been forced to sell at a loss. 22 In the
past, they had been able to store coffee to sell at higher prices later in the season, but due
to abrupt price fluctuations and price cuts in 2000-2001, the storage of coffee has become
very risky. Meanwhile, coffee processing and exporting enterprises currently have bad bank
debts on the order of billions or even tens of billions of VND, with an average of over VND 5
billion per enterprise. Because of this, they are now paying special attention to diversifying
their products. All enterprises surveyed now have fax machines and computers connected to
the internet to facilitate analysis of the international market and signing of contracts. 23 These
enterprises are in a strong position to provide information on prices and state credit policies
to private middlemen, yet presently they focus only on short-term information.

4.1.7 Insufficient capital

Most poor households have found it difficult to access official loan sources, in part because
they have less land (hence less collateral), a lower educational level, and fewer saving
opportunities. Taking debt size as a proxy for the degree of access to credit, Figure 16
shows that households suffering from food insecurity have less access to loans than do the
food-secure in all three districts surveyed. Even when the poor are able to borrow, some on-
lend to other people, using the interest to repay the bank, but leaving them with no capital for
farming.

21
According to local officials, collection of agricultural taxes from the poor has been very difficult. Since 2001, all
residents of zone III are exempt from payment of agricultural taxes, which those in other zones receive 50%
"discounts." In addition, poor households are exempt from payment wherever they live.
22
Many agents have agreed to accept coffee from farmers as collateral, providing farmers with money or rice in
return. When farmers want to sell their coffee, they "fix" a price and settle their debts. After the Tet holiday in
2002, when the coffee price reached VND 6,000/kg, many agents rushed to sell the coffee they had been
holding. When prices rose even higher later on and farmers wished to fix prices with the agents, they were
unable to, because their coffee stocks had been sold. (Some news reports state that as a result, some agents
were forced to leave some areas.)
23
Almost all coffee exporting enterprises surveyed have in place systems to buy information from Reuters. At a
cost of about VND 10 million/month, enterprises have installed facilities to collect satellite information as well as
computer systems. They can monitor daily prices in the international coffee market in London, along with forecast
reports. At the same time, they can directly participate in transactions and make orders online.

28
Women's saving/credit groups are Figure 16 Comparison of average debt of food-
also facing difficulties. Every shortage versus food-sufficient households
month, their members pay
interest and put aside savings. Food shortage Food sufficient
The amount is not large (VND 10-
3.0 2.72
15,000/month), but when coffee 2.62
prices are down, many of the 2.5
women cannot contribute or 1.89

million VND
2.0
repay their loans, limiting the
1.5 1.32
operation and even viability of the 1.19
groups. 1.0
0.52
0.5
Most ethnic minority households
surveyed have been following a 0.0
cycle of spending first, paying Cu Mgar Buon Don Lak

later. Early each year, they

borrow money from coffee traders Source: Broad-based quantitative survey, Dak Lak, March 2002.
and middlemen at interest rates
higher than the bank, from 1.5%/month to as high as 5%/month in some cases (meaning
that a loan of VND 100,000 requires a monthly interest payment of VND 5,000), to buy
fertiliser, oil and rice. At the end of the year at harvest time, these households must repay
both the loan and the accrued interest in coffee or cash. When coffee prices declined, coffee
revenues declined also, increasing people's in-kind debt. In fact, since the 2001 coffee
season, most traders and middlemen have stopped providing loans to coffee producers.

Box 4 Middlemen with non-performing loans are also in a precarious position

Mr H is the middleman who purchases coffee in Ea Pok commune, Cu Mgar district. Companies often
pay him 100% in advance to purchase coffee for them. The difference between the companys price
and the purchase price is about VND 100/kg. Farmers in the area have had a long relationship with
Mr H and bring coffee directly to his house. Mr H also has 8 ha of coffee plantation land with an
average yield of 4 tons of coffee beans/ha; at the current price of VND 5-6,000/kg, he still makes a big
loss. He has 6 permanent workers at a salary of VND 500,000/month each.

Apart from purchasing and growing coffee, Mr H also provides loans for others to buy fertiliser at an
interest rate of 1.5%/month. Farmers can repay in cash or coffee. At current price levels, farmers owe
Mr H over VND 100 million. Last year, for the first time, Mr H had to borrow VND 80 million from the
Southeast Bank, using all his land as collateral at an interest rate of 1%/month for repayment within 3
years. At present, he is losing from coffee and does not dare to borrow more.

The heavy debt that many poor households owe banks has also left them very afraid of
borrowing more. They want to settle their existing debts first, even if banks would be willing
to provide them with preferential loans and longer repayment periods. Only Kinh and rich
ethnic minority households in coffee-intensive areas now want to borrow more to invest
further in coffee. Loan suspension notwithstanding, bank policy is ostensibly to keep lending
to households in coffee-intensive areas and in areas slated for intensive production under
government master plans; however, this policy has not been implemented. Therefore, in
fact, banks have not been providing coffee-growing households with further access to loans.

4.1.8 The need for cash and even lower selling prices

No poor households have coffee left right after the harvest (at Tet). They must sell it all to
get money for the holidays, to pay their debts and buy rice and materials for the next
season; if they do not repay, they will not be allowed to borrow in the next season. With
prices at an all-time low, though, poor farmers are finding that even selling all their coffee
right after the harvest does not give them enough money to purchase needed goods and
repay their debts. These households have lost control over the sale of their producewhen

29
it can be sold and at what price. Poor households in particular are in a weak bargaining
position (see Tables 14 and 15).

Table 14 Average selling price of coffee by household type, 2001 (VND/kg)

Kind of coffee Rich Medium Poor Very hungry
Fresh coffee 967 859 764 792
Dried coffee 2,128 1,889 1,681 1,742
Coffee beans 4,836 4,293 3,820 3,960
Source: In-depth quantitative survey, Dak Lak, March 2002, and ICARD.

Table 15 Coffee purchasers by household type, 2001 (%)

Purchasers Rich Medium Poor Very hungry
Private middlemen 92.7 90.7 92.5 96.1
Private enterprises 3.7 0.0 5.3 3.9
State purchasing agents 3.2 6.5 0.0 0.0
SOEs 0.4 2.8 2.2 0.0
Source: In-depth quantitative survey, Dak Lak, March 2002, and ICARD.

4.1.9 A new need for (weak) extension services

When coffee prices were high, people concentrated on coffee growing, and exchanged
information and knowledge with each other. Most coffee producers only invested in fertiliser,
pesticides and expanding their plantation area, while ignoring many necessary technical
procedures (for example, the planting of shade trees and wind-shield trees 24). With low
coffee prices now, the situation now is different; farmers regularly ask, What should we
produce? Extension courses on growing rice and other crops and on livestock production
have been organised over the last two years, but their impact is limited. Radio and television
are the main conduits of information for local people, but the poor have less access to these
media. Telephones are a scarce resource even for the well-off (out of 178 people surveyed,
only one actually has a telephone, while just 40% of people in Buon Don, 30% in Cu Mgar,
and 7% in Lak even have access to a telephone). Over 90% of surveyed households have
received no technical extension services. Even those farmers who have, explain that they do
not have the money needed to apply what they have learned (see Box 5).

Box 5 No money to apply extension lessons

Mr E, 28 years old, and his wife Mrs L, 26 years old, live in Nieng 1 village, Ea Nuol commune, Buon
Don district. They are the heads of a poor family with three small children. They moved out of their
parents' home three years ago and were given 5 sao of coffee fields. In addition, Mr E has rented one
ha at a price of VND 1.1 million/year to grow maize as a first crop and cotton as a second crop (from
July to November). He harvested 1 ton of cotton at a price of VND 5,500/kg, generating more income
than from their maize and beans, partially because he got support in advance from a cotton company.
He has also participated in two extension courses but said, participation does not mean application
because I have no money to buy chickens to breed.

The head of the village said that the village still maintains an extension club, registers interest groups
and invites extension staff from the district to give lessons to classes of 30 attendees each. In courses
on chicken raising, the district extension division staff provided chickens to three families who all
benefited, but this was just a model. Until now, no other households have followed that model.

4.1.10 Limited benefits from input-support programs

Some organisations such as the Farmers Union, a micro-bio fertiliser company and banks
have co-ordinated to design a project that lends fertiliser at preferential interest rates, under
the condition that farmers must pay a certain amount in advance. Poor people who want to
borrow but have no money to pay in advance cannot therefore benefit from this program.

24
Coffee plantation area expansion in deforested areas has strongly reduced the wind-shield function of forests.

30
Moreover, local staff who distribute the fertiliser and receive debt payments seem to be
hesitant to let the poor borrow for fear of non-repayment.

Box 6 Lower access to in-kind loans for the poor

Nieng 1 village, Ea Noul commune, Buon Don district, has a program to provide fertiliser as in-kind
loans without collateral from the Farmers Union. The conditions of the program are that households
must pay 30% of the total fertiliser value in advance, and the remainder at the end of the season with
a low interest rate of 0.5%/month. In 2001, 66 tons of fertiliser were provided as loans, and by March
2002, an additional 22 tons had been provided. However, very few poor households have money to
pay in advance, so they get no benefit from this program. The village head said, "we have to choose
those households which are able to take care of their coffee, otherwise they will have difficulty
repaying their debt."

In general, fertiliser use by ethnic minority people for coffee production has fallen
considerably with the low coffee prices, though the use of subsidized seeds for rice and
maize has increased. People living in areas unfavorable for coffee-growing ("zone III" FN) do
get input price subsidies, but the poor do not have money to buy fertiliser so do not benefit
from fertiliser transportation cost subsidies (they claim that Kinh people buy them up). 25

Surveyed farmers receive no support for selling products to coffee processors or export
companies (except from the coffee area under direct control of coffee companies).

4.1.11 Price information: less relevant, less accessible

Before selling their coffee, farmers often ask village heads about the prices offered
throughout the neighbourhood, or observe the prices on offer on agents' price boards.
(People commented that price boards are shown even in the streets.) With strong
competition, however, purchasing prices do not differ greatly. Moreover, farmers who are
very concerned to know the selling price at certain times of the year (such as prior to Tet)
are less concerned at other times, since they "do not have much coffee to sell so do not
need to know the price.

Even those farmers who are interested in price information find that it is not always very
accessible. Although provincial radio provides information on prices every day, the poor
often do not have radios or televisions. Some village heads have been provided with a
television, but farmers only come to watch in the evening, while price information is
broadcast during the daytime. Lacking information about price fluctuations during the year
makes it difficult for poor farmers to adjust their investment appropriately for the next
season.

4.1.12 Deforestation

Attractive market signals in the 1990s encouraged the province to exploit more "barren land"
for coffee production, while increased migration gradually ate up production land. The
natural environment has been seriously devastated as a result. Forest coverage decreased
from about 90% in the 1960s to 57% in 1995, and to less than 50% in the late 1990s. In the
past 20 years, Dak Lak has lost 20 thousand ha of forests a year 26 to both public and private
coffee plantations and gardens. (It is one of the contradictions of the transformation from
central planning to a market-oriented economy that while half of Dak Lak's forestry area is

25
The Agricultural Material and Food Company of Dak Lak province said that its fertiliser consumption had been
reduced by 50% compared to previous years' average consumption of about 60,000 tons/year. Previously, the
company had agents in ethnic minority regions, but demand was too low while the company still had to pay
overhead for such things as staff salaries, forcing it to move its fertiliser shops to regions inhabited by both Kinh
and ethnic minority people.
26
According to the Land Allocation Department of Dak Lak.

31
still managed and used inefficiently by state agro-forestry farms, more and more public
forest land has been transformed into highly-valued private agricultural land.)

4.1.13 Land shortage

Coffee production can generate Figure 17 Differences in land area between food-
great profits, but also requires a shortage and food-sufficient households
great investment. Excluding the
Food shortage Food sufficient
cost of household labour, the
direct investment required by a 1.8 1.60
1.69
household in Cu Mgar district is 1.6 1.35
nearly 10 million VND per ha, 1.4 1.20
1.2 1.08

Hectares
which exceeds the funds available 1.0 0.76
to most local people. At the same 0.8
time, the need for funds of 0.6
0.4
indebted and newly-created
0.2
households (both ethnic minority 0.0
and Kinh) pushes them to transfer Cu Mgar Buon Don Lak
or lease their land: a long-term
lease (6-12 years) can earn them Source: Broad-based quantitative survey, Dak Lak, March 2002.
over VND 10 million/ha. 27 Finally, high coffee prices had pushed up the price of coffee fields,
thus also increasing the price of other land that could be transformed into coffee fields.
Hence, some wealthy immigrants have been able to buy land from local people to expand
their own coffee farms. Once their own land has been sold, local people must seek other
land deeper in the forest and farm in less favourable areas with steep slopes, low fertility,
less water for irrigation and more difficult living conditions overall. An increasing number of
newly-established households, whether migrant or local, has further decreased the per
capita land holding in the province.

Box 7 The perennially poor" lack land

Ethnic minorities short of land retreat to the forest Mr C, 38 years old with four children, is the
head of a poor Mnong household in Dung village, Dak Phoi commune, Lak district. He has 2 sao of
coffee garden land, 500 m2 of paddy fields and 5,000 m2 for maize. He first planted coffee in 1994,
gaining his highest profit of VND 800,000. Since 2001, however, his coffee trees have produced no
berries, due to the hot weather, a lack of water, and the low level of other inputs. The output from his
rice and maize is not considerable, and he does not raise any animals. The most important income
source of this family now is cutting le trees from the forest to sell, trimming dot trees to make
brooms, and harvesting young bamboo from the forest. All these activities earn him about VND
10,000 a day. Mr C wants to borrow money but he is afraid of being unable to repay his debts. He
also needs to rebuild his house but cannot earn the VND 3-4 million it will cost. Lacking capital and
production land, he finds no way to escape from his current situation.

Kinh people without land are also extremely poor Mr D, 29 years old with three small children, is
the head of a poor Kinh family in Hoa Nam village, Ea Nuol commune, Buon Don district. He was a
migrant to this area 10 years ago. His family has no land and is living in a temporary house on the
land of his wifes parents. He has no valuable assets. Every year, he must hire 4-5 sao of land from
ethnic minorities to grow maize and beans. This year, however, he was unable to hire land because
he has no more money and people around have also sold most of their land. He and his wife now
have to work as hired labourers to earn a monthly income of only VND 200,000. The decline in the
coffee prices has resulted in daily wage rates falling from VND 20,000/day to only VND 15,000/day.
He wishes to be allowed to move to a New Economic Zone and to receive land for production. In
addition, he wants to be supported with funds to raise cattle.

27
Local authorities at all levels reported a strong decrease in land use transfers in Dak Lak recently. A number of
decrees have been issued limiting or forbidding the purchase of land from ethnic minorities in certain areas.
Limited funds for further exploitation also prevent some ethnic minority people from selling their land. However, in
survey sites, the team still heard of cases of people selling their land unofficially.

32
Land shortage can be defined in terms of land quality as well as of the amount of land a
household has. Lak households with 1 ha of land can still be food sufficient, while
households in Cu Mgar and Buon Don with 1 ha of land suffer from food shortage, and need
much more land (60% more, in fact) in order to achieve food security, reflecting the
differences in land quality among the districts. Land quality is low due to (a) lack of irrigation,
(b) being far from a watershed or on sloping and/or exhausted land, and (c) its inadaptability
to certain crops.

Land shortage has also led to non-economic problems for crowded ethnic minority
households, with an average of 5-10 persons but just 5 sao. Land disputes between local
ethnic minority people and migrants are becoming more and more complicated. 28

4.1.14 Water resources

The serious devastation of the forests brought about by the increase in coffee plantations
has led to an ecological imbalance, particularly an inability to regulate water resources. Dak
Lak depends on groundwater during the dry season. Thanks to the development of national
and provincial electricity networks, many households are able to access groundwater by
digging wells and installing water pumps. Yet coffee is a water-intensive crop. It is estimated
that about 40% of the current coffee plantation area is irrigated by groundwater, using up
about 66 million m3 during the dry season, or 438,400 m3 per day. Provincial authorities find
it difficult to manage their water resources; indeed, the high rate of exploitation has
exhausted a number of sources already. 29

4.2 A look at the stakeholders

4.2.1 The impact on coffee monoculture households

Households living in favourable coffee-growing Box 8 No buyers for the farm!

areas such as Cu Mgar have specialised in coffee, Six years ago, Mr T (of Dak Rung
becoming "monoculture households." When coffee commune, Dak Song district, Dak Lak)
prices were high, all garden land, hill land and used all his assets (including vans, two
"waste land" was converted to coffee plantations. houses, and a shop in Buon Ma Thuot
Many families invested all their savings and city), to invest in coffee to a value of
borrowed from banks to buy more land to expand over VND 1 billion. When coffee prices
their coffee production. As a result, when coffee stayed low for a long period, however,
prices declined, they no longer had savings to he did not see a return on his
maintain their coffee land and fell into debt, often as investment, and he had to give up three
coffee farms with a total area of 24 ha.
much as several million VND. Many of these
With prices so low, no one is interested
households had raised no animals and lacked in purchasing his coffee farms.
knowledge of and experience in planting other Source: VnExpress
crops. Further, the basal red soil of these areas, so
favourable for perennial industrial crops such as coffee, is not good for planting annual crops
such as rice.

Poor monoculture households have therefore suffered a decline in living standards and a
lack of food. They are forced to depend on hiring their labour to other farmers, though the
income from such work is low, and the work is seasonal and short-term. Richer monoculture
households have been able to rely somewhat on their savings from the high-price period.

28
Mnh C-ng, 2002.
29
Danida and Dak Lak People's Committee, June 2001.

33
 Box 9 Poor monoculture households suffer
Mr N, 45 years old, is the head of one of the poorest households in Ea Sut village, Ea Pok commune,
Cu Mgar district. His family has 7 children who have all quit school. He has one ha of coffee land,
including 2.5 sao of coffee garden land and 7.5 sao of coffee fields. Previously, when coffee prices
were high, his family had a cassette player, enough rice for food and enough money to buy fertiliser
and water for their coffee trees. But now his family has to eat cassava (though three times, he has
received state support of rice, each time 5 kg/person). He has never borrowed money and knows
nothing about loans. He has no intention of cutting down his coffee trees even though he has no more
money to buy fertiliser (he is too poor so agents do not allow him to buy it on credit). His wife, two
older children and himself must now work as hired labourers.

If coffee prices continue to drop in the coming years, Mr N will not be able to grow more coffee as he
will not have the money to irrigate or fertilise his coffee trees. This year, he intends to plant durian and
sweet potato along with coffee. He wants to borrow money without paying interest for three years in
order to have money to take care of his coffee. In addition, he wants to receive technical support.

4.2.2 The impact on diversified households

Coffee-growing households in less Cattle raising is typical of rich households

favourable coffee-growing districts such
as Buon Don and Lak have many non-
coffee income sources such as paddy,
other food crops, cotton and especially
cattle raising.

Richer "diversified households" have a

better life. The decline in coffee prices
has affected their incomes, but not
dangerously so.

Box 10 The better-off are not very affected by low coffee prices
Mr P is the head of a rich household in Buon Nieng 2 village, Ea Nuol commune, Buon Don district.
He has four children of whom three are pursuing their studies and the last is too young to go to
school. He has 2 sao of garden land, 1.2 ha of coffee fields, 3 sao of other fields for planting cotton,
green beans and maize, and 1 sao of water paddy. He also raises two cattle and one pig.

In 2001, he earned VND 3 million from maize and beans. Since 2001, he has planted cotton on 3 sao,
harvesting from July to November. He has signed a contract with a cotton company (the village head
keeps the contract). For every 1 kg of seed he planted, he was provided by the company with 2 bags
of fertiliser and 1 bottle of a fungus-prevention drug. In 2001, he harvested 7 quintals of cotton,
receiving VND 1.7 million.

His family has not cut down their coffee trees, only reducing their investment in them. In this difficult
period, he does not hire workers and does all the work by himself. He said, "lower coffee prices do not
much affect my family's income."

4.2.3 The impact on the poor

Most of the poorer households, especially those in less favourable coffee-growing areas, do
not plant coffee. Those who do, make only a little money from it because their land area is
so small (just a few sao) and their yield so low (due to low investment). They had begun
planting coffee in the high-price period from 1994 to 1997, but often a bit later than their
neighbours, so when their coffee trees were ready for harvesting, the price had already
began to decline, causing large losses (see Table 16). High coffee prices did not, therefore,
bring a substantial benefit to these households.

34
 Box 11 A poor ethnic minority household follows extensive cultivation
Mr D is the head of a household in Paiar village, Dak Phoi commune, Lak district. His family moved
out of their parents' home just 4 years ago and has one small child. He is very poor, with "not enough
rice for 3 meals a day." He has had 4 sao of coffee land since 1998. Last year, he harvested 70 kg,
which had been watered just once at a total cost of VND 100,000 and fertilised with 20-30 kg of
fertiliser. This year, after harvesting, he must ignore his coffee due to low coffee prices.

His family also has 6 sao of field land, which they previously used for planting upland rice. However,
now he must replace the paddy with other crops, due to poor quality of the land. Last season, he
harvested only 1 quintal of dried maize due to a lack of fertiliser, earning a total revenue of VND
100,000. In addition, his family possesses some hundreds of square meters of paddy fields which lack
water, so each year, he only harvests 50 kg of rice, enough for just one month's eating. Mr D must
work for others in less busy times to earn a few thousand dong a day. His wife goes to the forest to
collect wood every two to three days but earns only VND 2,000/trip. He has never borrowed funds
from a bank as he has no land use certificate. Now, he really wants to borrow money to buy two cows.

Table 16 Average area and age of coffee trees by district and household type (ha and years)
Cu Mgar Buon Don Lak
Household type
Area Age Area Age Area Age
Rich 1.8 12 1.4 12 0.8 10
Medium-off 1.9 12 2.6 8 0.6 7
Poor 1.7 9 1.3 8 0.6 5
Very hungry 1.2 10 1.2 5 0.2 7
Source: In-depth quantitative survey, Dak Lak, March 2002, and ICARD.

4.2.4 The impact on ethnic minorities

The most obvious impact of low coffee prices on ethnic minority women has been a change
in family diet and a reduction in family income, particularly in coffee monoculture
households. Previously they had enough food, always had several hundred thousand VND
in savings in case of illness, and never ate cassava. But now for the lack of rice, many of
them must eat cassava. People here started planting cassava in 2000. Poor women report
that now they have to help earn money, for example by going to the forest every day to
harvest young bamboo, whereas previously they only went to the forest for one or two days
after the harvest. Women feel increasing pressure from these difficulties, as they are
responsible for so many important aspects of the household, including supplying rice, while
men only go to work, and do not concern themselves with such trivial matters." They added,
we not only find difficulty in terms of our material life but also in terms of our spirit, because
we must worry for tomorrow. We are not comfortable with the current situation. Single
women feel much worse because in their case, they do not know with whom they can
discuss [their difficulties] and what they should do.

Another key worry of women is that their children may have to quit school for lack of money,
without even enough to buy shoes. Even some richer families who had been sending their
children to secondary or high school in towns or cities have had to force their children to
drop out of school due to high costs.

Relationships with their husbands are also of great concern to women. A hard life makes
both discouraged so quarrels happen regularly. However, few women interviewed
complained about the drinking habits of their husbands, even though they lack rice to eat but
still have tens of kg of rice to make alcohol.

Finally, the traditional communal use of forests by ethnic minorities has been circumscribed.
Instead, ethnic minorities have been forced to use forests unsustainably, as immigration has

35
decreased the length of the fallow period for shifting cultivation. 30 At the same time, ethnic
minorities' awareness of legal regulations is limited.

4.3 Coping strategies

4.3.1 Coping strategies of the rich

Most wealthier coffee-growing Figure 18 Drop in investment for fertiliser

households in favourable coffee- 140
growing areas such as Ea Pok and Ea 120
Nuol communes want to try to store

Index (1998 = 100) `

100
their coffee until prices are higher. At
80
present, these households are facing
some difficulty, but the majority are able 60

to wait, relying on savings accrued 40

during high-price periods, or on income 20

from jobs, pensions, and fruit trees 0

1998 1999 2000 2001
(mango and cashew). Most have Year

enough rice, but no meat, fish, or

Fertilizer index Price index
beer. However, their investment in
their coffee trees has seriously Source: In-depth quantitative survey, Dak Lak, March
declined; most of them only water their 2002, and ICARD.
trees, having reduced their use of
fertiliser dramatically (fertiliser use is just 30% of its 1997-98 level; see Figure 18). Farmers
are also choosing lower quality, cheap fertiliser and adding less manure than in previous
years.

Rich households always follow coffee market signals. When the price increases even
slightly, they increase their investment, showing their ability to do successful business (the
first criterion of rich households). However, every decline in investment during low-price
periods makes coffee tree recovery more and more difficult, resulting in gradually reduced
productivity. If the price of coffee continues to decline, even many rich households practising
coffee monoculture will have to cut down their coffee trees and plant other crops.

Box 12 Richer households keep their trees and hope

Mr S is the head of a rich E De household in Lang village, Ea Pok commune, Cu Mgar district. He
graduated from 11th class, the highest educational level of all the villagers, and has three children
studying in primary school. His family produces coffee on 5 sao of garden land and over 2 ha of fields.
He also has a contract with the Ea Pok Coffee Company to plant coffee on a further 8 sao. In 2001,
he purchased 4 more sao of coffee land at a price of VND 38 million. Other than coffee, his family
plants no other crops and raises no animals. In the 1997-1999 period, every year he made a profit of
VND 10 million from coffee, after deducting production costs. In 2000, when the price of coffee began
declining, he lost VND 8 million and in 2001, he lost another VND 10 million.

Since early 2002, he has only watered his coffee twice and provided enough fertiliser to keep the
trees alive. He does not dare to invest more for fear of further price drops. Previously, he produced an
output of 4-5 tons/ha, but this year, productivity is forecast at only 1-2 tons/ha. At present, he is
bearing a debt of VND 9 million. Mr S and his family have had to reduce their daily meals from 3 to 2
and the quality of their meals has also declined: no more meat or fish, just rice and vegetables.
However, Mr S continues to send his children to school as usual. He wants to receive a "red book"
(land use certificate) for his land in order to be able to borrow loans directly of about VND 19 million to
purchase more oil and fertiliser to take care of his coffee.

30
Nguyn Ngc, 2001 and Mnh C-ng, 2002.

36
4.3.2 Coping strategies of medium-off and poor households

According to estimates by local people and officials, about 50% of the ethnic minority
households producing coffee in areas favourable for coffee growing, and almost all those in
areas unfavourable for coffee growing, have ignored their coffee since March 2002. The
majority of medium-off and poor households are unable to irrigate and fertilise their coffee,
or may irrigate a little but do not fertilise it. Meanwhile, since the hot weather of early 2002,
coffee plantations have become increasingly drought-stricken and may have been
permanently damaged or destroyed. Despite all this, most people have not yet cut down
their coffee, whether because they are loathe to waste the investment of money, land and
effort, because they do not have money to hire people to cut it down, or simply because they
have not yet thought of other ways of putting their land to use.

Medium-off and poor households which have been able to diversify into paddy, maize,
beans and animal husbandry have a more stable albeit still poor life. Coffee monoculture
farmers, on the other hand, are now facing acute difficulties. Many of them have had to
borrow money to survive, now eat very basic meals of rice porridge or rice with maize or
cassava, or are forced to sell their labour. If losses continue next year, most medium-off
monoculture households will have no other choice but to go beyond mere abandonment into
outright destruction of all or part of their coffee plantation, and attempt to diversify to other
crops.

Box 13 The poor still rely on coffee and cling to the hope of a better life
Mr M is 54 years old and has 9 children. His is a poor E De family from Pok village, Ea Pok commune,
Cu Mgar district. Apart from 1 sao of water paddy with a low productivity due to water scarcity, he also
has 1 ha of fields, for which they have received a "red book" (land use certificate), which they use for
coffee cultivation. In 1998, drought forced them to cut down all their coffee trees on this one ha. As
well as coffee, he has intercropped beans and maize, selling it at harvest to agents in order to buy
rice. Sometimes, he also works for others and is paid at VND 15,000/day, but this is rare.

In 2000, Mr M borrowed VND 15 million from the bank to buy irrigation pipes, oil and fertiliser. A small
part of the loan was used to buy rice. Even now, his family only lives on 2 meals a day, but he
remains determined to continue taking care of his 1 ha of coffee trees with the view that even if no
one plants, I still am with the hope that next year, coffee prices will go up, and I will make a profit.
Since early 2002, he has watered his coffee four times, each time adding 2 quintals of fertiliser. He
plans to continue watering and fertilising, following the market signals. He hopes that next year, his 1
ha of coffee fields will produce at least 1.5 tons of dry coffee beans at a price of over VND 10,000/kg,
substantially improving his and his familys lives.

For families like these, any support from the state is very valuable. What he needs most are rice,
fertiliser and oil to maintain his coffee. He also wants to be supported in order to raise pigs. He does
not dare to wish to borrow any more money from the bank and wants to settle his old debts first.

In fact, in all surveyed communes, some households had already begun destroying some
coffee trees. More mature coffee plants grown on hillsides with less water are generally the
first to be destroyed, as they are less productive and more costly to maintain. Rich
households that have been producing coffee for a longer period are often the first to destroy,
or "stub", their coffee trees because the process costs money (around VND 2-3 million/ha).

After coffee trees have been cleared, households usually move into annual crops, especially
maize 31 and cotton. Cotton is popular because cotton companies provide inputs to
households and ensure future sales via contracts, and because cotton can generate higher

31
The Agricultural Material and Food Company of Dak Lak province said that when coffee prices are low, the
purchase of subsidised maize varieties increases sharply as there is a stronger push for farmers to transform
their crop structure. The purchase of hybrid maize increased from 3,000 tons in 1999 to 5,000 tons in 2000 and
6,000 tons in 2001.

37
incomes than other crops. On the other hand, cotton requires a lot of labour and is risky,
especially if it rains during the harvest. Cotton is also subject to fierce competition from
imports, while the possibility of protection is likely to reduce substantially under trade
liberalisation.

Few farmers have completely given up coffee growing, however. A number of poor
households in the more favourable coffee-growing areas remain resolute in their intention to
continue coffee cultivation, because they see it as their only chance to escape poverty.
While others destroy their trees, this group plans to continue to invest money and labour in
coffee in the hope of an increase in coffee prices and incomes.

The number of households producing upland coffee along with other crops such as maize,
beans, and cotton is extremely low. Those households which do grow coffee are unsure as
to what crops they could replace it with. What they are concerned most about when
diversifying from coffee is that markets be available for their products at acceptable prices:
they had at one time been encouraged to diversify into pineapples, but no market existed for
their produce and companies failed to sign contracts with farmers. This has made them
reluctant to attempt to diversify again.

Box 14 Cottona way out for coffee producers?

One cotton company in Dak Lak is implementing a cotton plantation program via contracts in a
number of districts. Those who want to plant cotton must register and then sign a contract with the
company. Cotton producers are provided with technical advice, seeds and tree varieties, chemicals
and fertiliser in advance. At harvest time, farmers are required to sell their cotton to the company at
an agreed price of VND 5,500/kg. Farmers see cotton cultivation as more beneficial than maize or
beans. The cotton area has expanded to 3,000 ha in Cu Mgar and 1,500 ha in Buon Don so far, and
is continuously growing. In the short term, cotton provides farmers with a good means of
diversification and can be intercropped with maize or legumes.

Over the longer-term, will cotton cultivation prove sustainable? The answer to this question depends
partly on cotton price fluctuations in the world market, tax reduction plans in Viet Nam for imported
cotton, and the production costs of Vietnamese cotton processing companies. Although the domestic
market is big enough to sustain an increasing cotton output, domestic cotton production does appear
to be less competitive, with high production costs, than imported cotton. However, in the short term,
Dak Lak farmers still require an income and need the profit that cotton can provide, as a replacement
for coffee. Cotton as an annual crop also provides more stability than does coffee.

38
 Chapter 5 Simulations of the impact of current and future policies
on coffee production and producers in Viet Nam
5.1 The impact of current policies

5.1.1 Increasing coffee production

In a single competitive world market, changes in the output of a minor country or company
will have a very minor impact on the market price. In other words, the minor country is a
price-taker. Conversely, changes in the output of a major country will have a large effect on
the world price, as well as on the revenues of all other producers. In other words, the major
country is a price-maker. Major agricultural exporting countries seeking to optimise income
not only develop their production based on their natural advantages but also adjust their
output relative to that of other countries, considering the impact of a variety of factors on
supply and demand and the output of each country.

The world coffee market

depends mainly on the
output of a number of
large producers such as
Brazil, Columbia,
Indonesia and Viet Nam.
Figure 19 Vietnamese coffee export volumes and
prices, 1990-2001
3000
2500
Export price (USD/ton)

An increase in exports of
2000 Estimated
any one of these demand curve
countries can have a 1500
large impact on the
world price. The result of 1000
a regression analysis, 500
based on Vietnam coffee
export data of 1994- 0
2001 period, illustrates 0 100 200 300 400 500 600 700 800
that there is a negative Export volume from 1990-2001 (000 tons)
linear relationship
Source: based on data of Vietnam GSO and Customs Department.
between Vietnam coffee
export volumes and
export prices (see Figure 19). In the 1990-1993 period when Viet Nam's export of Robusta
was low, the relationship between Robusta export prices and Viet Nam's Robusta coffee
output was insignificant, but since 1994, when Viet Nams output began to grow, the
correlation between export price and export volume has tightened, meaning that the higher
Viet Nam's exports, the lower the world price.

A commonly-used measure of the sensitivity of the quantity demanded to the price is the
price elasticity of demand which is the percentage change in the quantity demanded divided
by the corresponding percentage change in the price. 32 The elasticity of demand tells us
about movements along a demand curve and the producer revenue reaches a maximum at
the point of unit-elastic demand, i.e. when the elasticity is -1 (see more details in appendix
3). The estimated demand curve based on the empirical data of Vietnam coffee trade shows
that the optimal point occurs at the export volume of 483 thousand tons and price of
US$1320/ton(see Figure 20). The volume of coffee exported in 2001 exceeded the optimal
point by about 270 thousand tons or 36%, resulting in an estimated loss of US$196 million to
the country and US$100 million to Dak Lak province alone.

32
Harrigan J., Loader R., and Thirtle C., 1992, p. 37.

39
5.1.2 Temporary storage
Figure 20 Export revenue and elasticity of
Recognising that low coffee prices, due demand
to an increase in world exports including
exports from Viet Nam, were Export price (USD/ton)
2500
increasingly making farmers worse off,
the government decided to encourage 2000

exporters to buy and store 150 1500

|Ed| = 1

thousand tons of coffee which had been

1000
due for export in 2001 (around 20% of Estimated price = 1327
USD/ton
total output that year). (The government 500
then compensated exporters for their
0
losses.) In so doing, Viet Nam joined a 0 100 200 300 400 500 600 700 800
number of ACPC members and other Export volume from 1990-2001
countries in an attempt to push up
prices. According to the regression Export revenue (million USD)
800
analysis this policy might increase the
export price of coffee by about 23%. Revenue = USD 637
million
The Government hoped that this would 600
lead to an increase in domestic and
farm-gate prices, thus benefiting coffee
producers. 400
Export volume 480
thousand tons
However, this objective was not
200
achieved for a number of reasons. 150 200 250 300 350 400 450 480 500 550 600 650 700 750
First, as exporters in Vietnam began Export volume from 1990 to 2001

to lose due to a slight rise in world Source: Based on data of GSO and Customs Department
prices, the Government agreed to
the export of 60,000 tons of the
stored coffee; in retrospect, it was clear that the stored coffee had been exported too
soon.
Second, storage was done in two periods, first in November 2000 and second in
February 2001, so the quantity of coffee stored each time was not large enough to
increase export prices as expected.
Third, Viet Nams coffee marketing channels are quite complex, so the effectiveness of
this policy would in the best of times be difficult to perceive; it would also be unlikely to
be equally beneficial to all groups, particularly the medium-off and the poor who are
disadvantaged in terms of access to information and price negotiation. Indeed, the group
most likely to benefit would be exporters. At best, as seen in Figure 21, this policy may
have held back the speed of price reduction somewhat; it clearly did not increase coffee
prices.
Fourth, levels of coffee stocks in developed countries and roaster TNCs may have
cushioned the world coffee trade from perceiving the supply decline.

5.1.3 Encouraging exports

Together with the temporary storage policy, the Government has encouraged government
enterprises to expand coffee export markets using an award policy (approximately VND 220
per US$1 of exports). All else equal, PAM analysis estimates that farm gate prices would
increase by 3.4% as a result of this policy, a fairly minor change, especially given already
very low farm gate prices (around VND 4-5,000/kg). Moreover, complex marketing channels
mean that the full benefit of this policy would not reach coffee producers, especially the poor,
remaining instead primarily with exporters.

40
 Figure 21 Storage policy holds back the speed of price reduction rather than
increasing coffee prices

14,000

The first The second

storage in storage in
11/2000 2/2001
Price (VND/kg)

10,000

6,000

2,000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6
Month

Source: Trade Pricing Department of GSO and Customs Department.

5.1.4 Providing subsidies

The government has implemented a variety of policies to provide subsidies to coffee

growers. One type of policy aims to subsidise farm gate prices. Its impact on farmers can be
measured by the nominal protection coefficient of output (NPCO). PAM analysis shows that
the NPCO is larger than 1, meaning that there has been a positive but small effect of this
policy on coffee producers. The tariff on coffee exports has been low for a number of years
and is now 0%, while from 1994 to 1998, when coffee production yielded high profits, the
Government did not impose high taxes on coffee trading enterprises' revenues. Moreover,
all "competent enterprises" are now allowed to export coffee, resulting in an increase in the
number of exporters and facilitating the development of a highly competitive and open
domestic coffee market.

PAM analysis shows that another variable, the Table 17 Values of some variables
nominal protection coefficient of input (NPCI), is measuring subsidy policy impact
also larger than 1, indicating that current District NPC EPC
present agricultural input policies have had a NPCO NPCI
small negative impact on coffee producers, Cu Mgar 1.030 1.033 1.030
possibly due to the zero import tariff rate levied Buon Don 1.025 1.035 1.028
on fertiliser in the last few years. Finally, PAM Lak 1.030 1.018 1.035
analysis shows that the effective rate of Source: In-depth quantitative survey, Dak Lak,
March 2002, and ICARD.
protection coefficient (EPC) is larger than 1,
which indicates a small positive effect of policies to promote production on coffee growers.

Overall, current subsidy policies have had little effect on the domestic coffee market, as
shown by the value of the three variables NPCO, NPCI and EPC of about 1 (see Table 17).

5.1.5 Extension policy

The role of the extension service has become more important than ever as it supports crop
diversification and helps to improve agricultural productivity. At present, local extension
activities focus on cultivation techniques and livestock raising, including technical training
courses and selecting voluntary households to experiment with training models in the hope
that others will follow. However, those activities tend to be mainly beneficial to the rich, while
the poorer get fewer benefits due to their limited knowledge, lack of capital and lower
participation in public organisations.

41
5.2 Potential impact of future policies

5.2.1 Reducing area planted to coffee

To overcome the difficulty of current price dampening, Dak Lak needs to reduce its
plantation area. The reduction level depends on many factors such as output of other big
producers in the coming years, and the output of other coffee-producing provinces in the
country.

Given a constant world demand for coffee, fixed coffee production in other countries, and
reduced coffee production in Viet Nam, a higher world price would generate higher revenues
for Viet Nam. Using econometric analysis and extrapolating from data in Figure 20, all else
equal, national output should be about 500,000 tons in order to get a maximum revenue of
US$637 million, with Dak Lak's production at 260,000 tons (as Dak Lak accounts for 53% of
total national production). Given Dak Lak's average 2000 productivity of 2.08 tons/ha, the
total coffee plantation area of the province should therefore be 126,000 ha. Yet the actual
coffee plantation area in 2000 was much greater185,336 ha. According to this calculation,
Dak Lak should reduce its coffee plantation area by about 60,000 ha in order to maximise
revenue. However, many other factors are difficult to hold constant such as other coffee
producing countries are already reducing their output, so the optimal level of production for
the country and the province needs to be assessed in more detail.

What coffee plantation area would meet market demand? Answering this question requires a
knowledge of supply and demand both inside and outside the country. If Viet Nam and other
countries either increase or decrease their output at the same time, Viet Nams export price
will be harder to estimate. For example, Brazil has the biggest coffee market share and the
greatest impact on world markets. According to ICARD estimates from regression analysis,
the elasticity of Viet Nam's export price with respect to Brazilian output at present point is -
0.95, meaning that a 1% increase/decrease in Brazilian output will reduce/increase Viet
Nam's export price by 10.95%. It is estimated that in the coming years, Brazil will continue to
increase output by about 5%/year. At the same time, if Viet Nam reduces its current area by
33%, and assuming that this also results in a decrease of its output by 33% as mentioned
below, 33 the coffee export price of Viet Nam could be around US$1,245/ton (see Table 18).

Table 18 Export price (US$/ton) of Vietnamese coffee as a function of changes in coffee

output of Viet Nam and Brazil
Increase/decrease of Brazil
output compared to
2000 (%) - 40 - 30 - 10 -5 0 5 10
- 40 1643 1581 1455 1423 1392 1360 1329
- 35 1549 1486 1361 1329 1298 1266 1235
- 30 1455 1392 1266 1235 1203 1172 1140
- 20 1267 1204 1078 1047 1015 984 952
- 10 1079 1016 890 858 827 795 764
Viet Nam

0 890 827 701 670 638 607 576

5 796 733 607 576 544 513 481
10 702 639 513 482 450 419 387
Source: the content of the table is derived from the estimated regression model (see more details in Annex 3)

Of course, as the production of all 17 main producers changes, price projections must be
recalculated, and the world supply-demand forecast becomes even more complicated when
demand fluctuations are taken into account. As the world economy is recovering, and with it
Asia and especially China, demand for coffee may therefore increase, reducing the problem

33
See section 5.2.2. Clearly, the assumption that a reduction in area planted by a certain percentage will result in
an equal reduction in yield is risky, but figures given are meant only to be indicative.

42
of over-production and possibly leading to a resurgence in coffee prices. However, even if
coffee prices were to bounce back, the "bubble" of expansion in coffee-growing areas of the
mid-1990s is unlikely to be repeated. The optimal production area in Dak Lak would still
need to be reduced by tens of thousands of ha. Instead, improved competitiveness will be
gained through increasing added value, reducing production costs and minimising risk.

5.2.2 Increasing farm gate prices

According to researchers, businessmen and farmers, five policies should be implemented to

increase farm gate prices. PAM analysis was used to estimate the impact of each.
Reducing transportation costs by 10% (through improving the road network to villages)
could raise farm gate prices by 0.54%;
Reducing the cost of unnecessary and expensive procedures such as police
examination of goods on the road from Dak Lak to Sai Gon port by 150 VND/ton/km
could increase farm gate prices by 0.61%;
Increasing investment in wet processing technology and boosting links between coffee
producers and processors could increase farm gate prices by 6.1%;
Increasing access to market information, especially for poor farming households, could
increase farm gate prices by 8.6%.

5.2.3 Increasing productivity

One of the most important goals of the Viet Nam coffee sector in general and the Dak Lak
coffee sector in particular is to maintain high competitiveness and to reduce production costs
through increased productivity. 34 At present many coffee farmers have a yield of 3 tons/ha,
and some outstanding farmers reach a yield of 5-6 tons/ha, while the province's 2000
average was 2.1 tons/ha. A report on Crop diversification and agricultural market research
produced jointly by the Dak Lak Peoples Committee and Danida suggests that coffee
productivity should be increased by 42.8%. If a substantial increase in productivity is
achieved, Viet Nam could be in a position to overcome major global price changes, while
surveyed areas, with an average productivity of only 1.5 tons/ha, could reap considerable
benefits (see Table 19).

Table 19 Impact of improving productivity on profit and cost

% increase in productivity due to use of new varieties and
suitable technology 10% 25% 50% 100%
Increase in profit/ha 14.0% 35.0% 70.0% 200.0%
Decrease in production cost/ha 9.9% 20.0% 33.3% 50.0%
Export price guaranteeing coffee producers a certain profit
(US$/ton) 609.9 558.5 502.8 446.8
Source: ICARD.

Table 20 Impact of reducing irrigation time on profit and cost

Decrease in irrigation hours 1.0% 5.0% 10.0%
Increase in profit 0.1% 1.0% 1.1%
Decrease in production costs 0.01% 0.13% 0.25%
Source: ICARD.

One important productivity-related factor is irrigation. In recent years, the use of groundwater
has been free of charge (not taxed); therefore most coffee producers in Dak Lak have
exploited groundwater to irrigate their coffee in the dry season. But according to coffee
experts of the Department of Agriculture and Rural Development of Dak Lak province,
34
Readers may note that increasing productivity could result in increased exports, further dampening world
prices, but productivity is only one of a number of variables in the highly complex coffee trade that must all be
considered together. Reducing the area planted to coffee while increasing productivity on the remaining area
could reduce costs as well as bringing export levels in line with maximum revenue volumes.

43
pumped water has not been used efficiently. At present, irrigation costs (such as hiring
machines, petrol, and so on) account for the largest share (around 27%) of total coffee
production costs, including labour, electricity, fuel, machinery depreciation and machine
hiring. Table 20 shows that decreases in irrigation time (through the use of new
technologies) could cut production costs and hence increase profits as well as productivity.

5.2.4 Foreign exchange policy

Due to the financial crisis in 1997, many countries in the region have had to implement a
floating foreign exchange rate policy. Although regional economies have recovered over the
past two years, foreign exchange rates are still far higher than before: in Indonesia and
Thailand, foreign exchange rates in 2001 were 3.4 and 1.4 times higher than in 1997,
respectively, resulting in greater competitiveness of their exports than that of other countries
less hit by crisis. In response, Viet Nam has gradually adjusted its foreign exchange rate,
however at a lower level than that of neighbouring countries. Viet Nams exchange rate in
2001 was around only 1.28 times higher than it was in 1997.

PAM analysis was used to estimate the impact of further exchange rate adjustment on farm
gate prices for poor households in Buon Don district with moderately favourable coffee-
growing conditions. If the exchange rate were allowed to reach the implicit exchange rate
of 16,995 VND/US$1 given by Montague in Competitiveness of Viet Nam exports: linking
trade policy with macro policies, poor households' farm gate price would increase by
approximately 30% and their profits by 97% (in comparison with annual average profits from
coffee in the last ten years of around VND 2 million /ha) (see Table 21).

Table 21 Impact of exchange rate adjustments on profit and price

Depreciation of domestic currency Increase in profit/ha Increase in farm gate price
5% 32.4% 10.1%
10% 64.9% 20.3%
15% (to VND 16,995/US$) 97.0% 30.4%
Source: ICARD.

5.2.5 Narrowing the price gap between Viet Nam and other countries

Five years ago, Viet Nams Robusta coffee price was US$130-150/ton lower than that of
other countries, due to poor business skills and organisation, low coffee quality, lack of
market information, poor marketing, low credibility in trade, and other factors. In the past
three years, however, the difference between the Vietnamese coffee export price and the
world price has decreased considerably to just US$50-70/ton. Based on Viet Nam's
experience in rice production and trade, once Vietnamese enterprises invest in improving
their competitiveness, the price gap will be further narrowed. PAM analysis shows that
higher export prices owing to improved marketing and processing skills will have a positive
effect on poor households in Buon Don district (see Table 22).

Table 22 Impact on profit and price of narrowing the gap between Viet Nams export price and
the world price
Will increase
Reducing the price gap by And farm gate price by
profit/ha by
60 US$/ton 30.4% 9.5%
150 US$/ton 71.0% 22.2%
Source: ICARD.

44
 Chapter 6 Conclusions and Recommendations
6.1 Conclusions

Over the last 15 years, economic reform and trade liberalisation have made a major
contribution to the development of the Vietnamese economy. One of the outstanding
examples is the Central Highlands coffee industry. Owing to market development, the
Central Highlands has become Viet Nams biggest coffee-specialised area, and contributes
considerably to the world Robusta supply. Coffee has helped greatly to increase the
economic growth rate of, and strengthen poverty reduction in, the region.

However, trade liberalisation has also had negative effects.

In the past, as world coffee prices rose, farmers just expanded production, rather than
focusing on the adaptability of coffee to local soil, water and forest conditions. Over-
expansion of the coffee production area has broken down the ecological balance of the
region.
Income and employment in coffee-specialised areas is much higher than in the rice
production areas of the Red River Delta and the forestry production areas of the North
Mountainous Region. This has attracted massive migration to the Central Highlands. The
sudden change in population structure has brought about cultural and social changes as
well. Ethnic minorities who have been accustomed to subsistence production have
suddenly had to adapt to an export-oriented production economy. Diversified cultivation
systems for ensuring the family's food security have been replaced by extensive
specialised gardens. These new production methods may generate higher benefits if
there are stable markets, but cause problems when there are market fluctuations.
Previously, in the Central Highlands, land was under the control of the village
community. After 1975, this management system was abolished in favour of state-owned
agro-forestry enterprises and corporations. Since reforms began, a large proportion of
agricultural land and a small proportion of forestry land have been allocated to
households, bringing about difficulties for local communities. Old customs of respect for
village leaders who distributed and managed the land of the community have died out,
while the new way of state and individual land control has not been completely
developed. Trade liberalisation together with high incomes from coffee production have
led to a fever of exchanging land use rights, creating coffee-specialised areas, while
local people have not been able to adapt themselves to the operations of a land market.
On the one hand, fertile land has been transferred to farmers from other areas, and on
the other hand, local people have encroached on public land and forests to continue their
coffee production in less favourable coffee-growing regions.
Another adverse aspect of trade liberalisation in the past few years has been
unbalanced profit distribution and the risky nature of coffee production. Due to their
advantages in accessing information, infrastructure, capital, human resources and so on,
coffee export enterprises have much more favourable conditions than do middlemen,
who in turn possess much more favourable conditions than do coffee producers. Foreign
companies purchasing coffee from Viet Nam and selling to international markets reap the
greatest benefit, while poor farmers and other groups such as women and ethnic
minorities reap the lowest. Coffee businesses and enterprises mainly act as middlemen
and do not pay enough attention to processing, market research and forecasting in Viet
Nam.

The price decline over the last two years, this year's low in coffee prices and the serious
drought, as well as the world coffee supply surplus, have all severely tested the stability of
Central Highlands coffee production. Diversified households in favourable coffee-growing

45
areas with sufficient capital and Government support have suffered serious losses but have
passed through the crisis. Small coffee monoculture households in less favourable coffee-
growing areas have been disadvantaged and cannot return to their former self-sufficient
production patterns; many are heavily indebted, and some do not even have enough food.
While rich households actively destroy their coffee trees, middle-off and poor households
struggle in hopeless conditions and passively abandon their coffee crops, by reducing
fertiliser and irrigation inputs and shifting to the cultivation of short-term food crops for their
own consumption.

In general, compared to other crops, coffee has enjoyed favourable trade policies inside and
outside the country. Over the past ten years of coffee development, Central Highlands
farmers have experienced both advantages and disadvantages as the coffee price has
increased and decreased. Indeed, trade liberalisation has created a great shock in the
Central Highlands in economic, cultural and environmental terms. Among the losers, the
poor have borne the heaviest loss.

In the future, the effects of trade liberalisation on coffee will likely not be reflected directly
through the changing of tax and non-tax policies but indirectly through trade and macro
policies on agricultural inputs (fertiliser, insecticide, oil, seed varieties, and so on) and other
agricultural products that could be combined with or replace coffee (pepper, cashew, cocoa,
cotton, fruit, cereal, rubber, and so on). The world coffee price will continue to fluctuate.
Efforts to deal with the negative impact of this situation should not only concentrate on
policies for coffee and the Central Highlands but also on other, indirect policies.

While this research was not able to cover all possible direct and indirect effects of
emigration, land management, and collaboration between producers and traders, it is clear
that the poorthe most vulnerable grouphave gained the least from trade liberalisation
and have had to bear the heaviest losses from its adverse effects. A system of policies and
measures to protect the poor from the negative effects of trade liberalisation is required. If
this task is not taken seriously, the success of trade liberalisation will be in danger.

6.2 Recommendations

6.2.1 Key policy recommendations

Four key policy recommendations emerge from the research.

First, reduce the area planted to coffee. Reducing the coffee plantation area, particularly
for Robusta in Dak Lak, is crucial. Surplus supply in past years was due to the over-large
coffee production area in Viet Nam in general and in Dak Lak in particular.
Carry out research to assess local socio-economic and natural conditions and the
biological requirements of various crop structures (Dak Lak province has already
conducted this research in co-operation with the Institute of Agricultural Projection) in
order to identify the amount of land and the areas in need of adjustment.
In favourable coffee-growing areas, continue and intensify coffee production. In the long
term, coffee in these areas will still be the most advantageous crop and an important
source of income. Long-term abandonment of coffee in these areas may exhaust coffee
supplies by the time prices go up 35.
In unfavourable coffee-growing areas, reduce coffee production and diversify. Inefficient
coffee plantations should not be maintained while land for other crops is limited.

35
In fact, after this research, coffee price increased to above 10,000 dong/kg (of coffee beans) at the end of
2002. Upon this time, people have cut down coffee trees on a large scale in coffee-suitable areas. For example,
in Pok village (Eapok commune, CuMgar district), people have cut down 150 ha out of total 300 ha coffee of the
village (50%).

46
 Reducing the production of coffee in these areas will help increase the supply of land for
other crops to improve incomes of the poor.

Second, improve credit services.

Suspend debts and offer credit rollover to give farmers further access to production
development loans, particularly for the purchase of new varieties and technologies;
Combine credit with extension activities; link loans with technical assistance in capital
management and technology application;
Establish credit groups linked with mass organisations such as the Womens Union and
Farmers Union;
Cover necessary costs for providing credit to the poor, rather than providing interest
subsidies;
Encourage other forms of credit, via mass organisations or the use of prestige
guarantees, for example;
Immediately identify favourable coffee-growing areas such as Cu Mgar district based on
research on land suitability. Then banks and investors should focus their credit and
support activities on these areas;
Increase farmers' ability to repay debt by implementing such policies as allowing a shift
from coffee to other crops, particularly in unfavourable coffee-growing areas, and
providing small extra loans for survival purposes;
Suspend or eliminate the agricultural tax accumulated before end-2000 for poor
households and ethnic minorities to facilitate their access to credit;
Develop credit groups to encourage and advise farmers in saving and making
investment decisions;
Organise capacity building and production instruction groups for the poor and ethnic
minorities as part of credit provision so their production investments really raise their
incomes and allow them to repay their debts.

Third, improve extension services.

Allocate a bigger budget for extension in poor, remote and mountainous areas;
Provide favourable working conditions for extension staff;
Encourage the development of volunteer extension systems to serve poor people at the
commune level;
Link extension activities with the provision of market information and credit. Extension
staff should collaborate with credit staff to help farmers develop project proposals to
access loans, implement advanced technologies and plant new varieties; 36
Provide women with better access to extension so they can increase their participation in
making and implementing decisions requiring technological knowledge;
Establish linkages between farmers, extension workers, researchers and trainers;
Develop extension methodologies suitable for ethnic minority groups, combining new
technologies with their customs.

At this moment, extension services should be focused on supporting farmers in

diversifying production in both coffee monoculture areas and areas where production is to
be restructured.
Production decisions should not be imposed by local authorities proposing specific kinds
of crops for each field and using policies and administrative measures to encourage
farmers to plant these crops. Crop restructuring policies in unfavourable coffee-growing
areas should not just focus on planning and recommending. Moreover, direct support

36
The problem is: extension first or credit first? At present, there is a dilemma in the collaboration between
extension and credit staff in Dak Lak. A staff member of the Womens Union in Ea Pok, Cu Mgar, stated, credit
staff told us to build pigpens and/or cow cages, saying that then we could have access to credit for livestock, but
we farmers must be assured of having credit first, and only then would we build such cages.

47
 to households attempting to diversity should be avoided, as this will lead to a habit of
dependency.
Instead, farmers should be provided with market and crop information and research
results to help them make their own calculations, consider their resources and the
adaptability of coffee in their regions, and decide whether they can compete in the coffee
market or whether they should diversify by developing short-term crops, industrial crops,
livestock or other activities.
Provide extension and consulting services to assist farmers to decide for themselves the
types of crops they will plant, the cultivation techniques they should use, and the other
income generation activities (such as raising cows) they should implement.
Implement supporting policies such as reducing agricultural taxes or cancelling them
altogether.

Figure 22 Helping farmers diversify production

Information for farmers on:
- Markets
Market supply- - Their production adaptability
demand research Identifying - New production methods
suitable scale
and production
sites
Issuing supporting policies:
- Encouraging land use transfer
Evaluation of land- - Credit for and investment in diversification
use adaptability - Extension services, marketing, establishment
of production organisations

Fourth, improve the market information system. All stakeholders in coffee production,
especially the poor, need timely transfer of information (about the prices of coffee and other
agro-forestry products, technology and production techniques, and so on) via various media
or via their communities. Further research is needed to assess farmers' actual information
demands.
6.2.2 Strengthening support to farmers

In addition to the four key policies, a number of other policies and actions should be
implemented to support farmers, both those making the transition from coffee-growing to the
growing of other crops and developing other sources of income, and those in favourable
coffee-growing areas who should be intensifying their coffee production despite currently low
prices.

Support production organisations.

Encourage farmers to develop production collaboration groups to support one another in
terms of technology, credit, marketing, and so on;
Improve relationships in terms of cooperation and contracting between coffee companies
and farmers (credit provided by coffee companies, contracted quantity per sao, labor
wages, land certificates, liquidation of coffee gardens, etc.); Develop a mechanism to
share profit between traders and producers to further enhance the income and living
standards of coffee producers.
Promote the role of commodity associations in ensuring uniform quality, prices,
trademarks, and so on.

37
In early 2002, Viet Nam approved the 2001 ICA. Accordingly, Viet Nam has agreed to implement policies to
bring its coffee trade in line with the ICA. On the other hand, Viet Nams coffee enterprises could benefit by
favourable coffee import tariff rates and consumption in member countries markets, and could receive support in
improving product quality.
38
The problem is: extension first or credit first? At present, there is a dilemma in the collaboration between
extension and credit staff in Dak Lak. A staff member of the Womens Union in Ea Pok, Cu Mgar, stated, credit

48
Improve land policy.
Review the current huge land reserves under the control of state-owned enterprises
(SOEs). SOE land that is unused or being used ineffectively should be allocated to
producers through contracts or transferred via land-use rights to local people;
Put forests and barren land unfavourable for agro-forestry production under the control
of local communities according to their traditional cultural and social customs;
Certify and contract for lease all agriculturally favourable areas, attracting investment
from all economic sectors;
Review and improve land use rights policies;
Invest in small irrigation systems and other needed inputs in order to expand land
reserves and improve land quality, particularly in upland areas.

6.2.3 Improving competitiveness

Various policies and actions need to be undertaken to improve Viet Nam's position in the
global coffee market.

Invest in research and development, focusing on the Coffee Research Institute and on
technological advances to raise productivity, reduce production costs, and increase the
quality of coffee.

Increase the added value of coffee.

Improve the quality of processed coffee and develop trade in processed coffee;
Encourage the use of wet processing technology by designing favourable credit policies,
applying farm contract systems linking farmers and processors, and setting up or
expanding coffee fields for wet processing;
Strengthen co-operation among farmers (especially local ethnic minority people) and
processors/exporters.

Increase productivity.
Promote the use of new varieties provided by specialised suppliers and support the
gradual replacement of seeds with grafting in Robusta cultivation;
Apply modern technology, such as the scientific use of fertiliser, shade trees, irrigation,
integrated pest management, and so on;
Reduce production costs. Advanced irrigation methods such as sprinkling or drip
irrigation could help reduce irrigation time and increase efficiency. Increased irrigation
efficiency and a reduction in irrigation hours would also help protect the ecological
balance.

Expand markets. National and international market supply and demand analysis should be
undertaken for different products. The capacity of export enterprises should be increased.
Attention should also be paid to promoting marketing to Vietnamese consumers and
increasing Vietnamese incomes in order to develop a strong domestic coffee market. China
should be a special focus. A futures market and price hedging funds should be established.

Fourth, implement a temporary storage policy for coffee. A storage policy will help the
government stabilise domestic prices. Implementation of such a policy will require a number
of activities, such as purchasing coffee directly from farmers or encouraging coffee
processors and local purchasing networks to stockpile coffee, establishing a warehouse
system with adequate capacity for producers, and international co-operation (conducting

staff told us to build pigpens and/or cow cages, saying that then we could have access to credit for livestock, but
we farmers must be assured of having credit first, and only then would we build such cages.

49
negotiations with major coffee-producing countries to destroy coffee that is of low quality or
temporarily store it). 39

Improve understanding of TNCs. If Viet Nam is to continue to deal with TNCs, it is

essential that it understand their needs and the way they do business in order to survive in
the international coffee market.

Adjust the foreign exchange rate in order to improve the competitiveness of Viet Nam's
exports.

6.2.4 Strengthening poverty reduction

Finally, several policies and actions need to be undertaken to continue to improve the living
situation of households in the coffee-growing region, particularly the poor, and in over-
populated areas (such as the north mountainous and central regions) which are a source of
the massive migration flow into the Central Highlands.

Reduce the risks of free trade.

Support a market information system to provide exact and timely information to small-
scale producers and businesses via television, radio, telephone and other means;
Support farmers to maintain production even in low-price periods (in combination with
such measures as reducing costs, increasing quality and ensuring long-run
competitiveness);
Encourage farmers to apply new technologies and varieties;
Provide credit to generate extra income;
Improve animal raising;
Improve cropping patterns and intercropping in specialised agricultural zones for export;
Research risk management measures utilised by competing countries, for example
futures markets and international hedge operation;
Facilitate the operation of co-operatives and associations of farmers, businesses and
processors (while ensuring farmers autonomy) so market risk is shared via contracts:
Survey current modes and levels of co-operation among coffee producers (especially
ethnic minority farmers), processors and exporters;
Develop preferential policies for enterprises to invest in processing and building
processing zones;
Introduce new techniques and provide needed inputs in advance (fertiliser and oil)
via enterprises, extension services, professional agencies and local institutions;
Actively promote trade. For enterprises to sign contracts with farmers, the question of
who will sign contracts with enterprises? must be answered. Key agencies such as the
Trade Promotion Department, Ministry of Trade, Trade Promotion Program of MARD and
others should work to:
Introduce Vietnamese coffee to new markets (such as China and Russia);
Ensure uniform quality standards;
Implement trademark registration;
Improve social security and community development work, in order to protect the poor
and vulnerable from market shocks.

39
In early 2002, Viet Nam approved the 2001 ICA. Accordingly, Viet Nam has agreed to implement policies to
bring its coffee trade in line with the ICA. On the other hand, Viet Nams coffee enterprises could benefit by
favourable coffee import tariff rates and consumption in member countries markets, and could receive support in
improving product quality.

50
Improve education services.
Invest in education in poor areas (building new schools/classes, providing books,
notebooks, uniforms, and other materials, assigning teachers, and so on). Ensure
support is useful: in surveyed regions, most poor households have yet to use the
Government's donation of 4 meters of cloth per household, simply because they do not
have the money to make it into clothing, yet as it has been given by the government,
they also do not want to sell it;
Decrease or remove tuition fees and contributions for school construction;
Set up a sub-fund from the poverty reduction support fund for the Central Highlands to
develop education infrastructure and support teachers.

Support ethnic minority women.

Consolidate Womens Union branches in each hamlet/village (currently, the Womens
Union is loosely organised and operates perfunctorily in many villages surveyed);
Strengthen support from the Government, banks and extension staff to the Womens
Union for the organisation of credit/saving groups to provide small loans of VND 1-2
million to develop small-scale income generating activities such as chicken raising, pig
raising and growing of vegetables and mushrooms;
Improve the knowledge and skill of women in the development of small household
production: chicken raising, pig breeding, vegetable and mushroom planting, and so on;
Provide support for children to attend school or prevent them from dropping out.

Increase local participation. Long-term policies must focus on capacity building and on
increasing the active participation of people in improving their own lives, rather than
continuing the passive dependence of some poor people.

51
 References
Customs Department, "Import-Export Tariff and Value Added Tax for Imported Goods,"
Financial Publishing House (1999).

Danida and the People's Committee of Dak Lak Province, "Report on crop diversification
and agro market research" (June 2001).

German Coffee Association, "Coffee handbook" (1997).

GSO, "Statistical Yearbook 2000," Ha Noi (2001).

Harrigan, J., R. Loader and C. Thirtle, "Agricultural price policy: government and the
market," FAO (1992).

Nash, John and Bryan Lewin, "International Task Force on Commodity Risk Management in
Developing Countries," World Bank (2002).

MARD and IFPRI, "Policy options for livestock sector of Viet Nam as a strategy for improving
and diversifying income of Viet NamRecommendations and initial findings" (2000).

Nguyn Quang Th, "Some measures to improve export coffee quality" in Agricultural
Economics Magazine, No.11 (1999).

Nguyn Th Nh, "Development of farms' economics in Viet Nam: theory, situation and
solutions," National Economics University (2000).

Nguyn Vn ng, "Farming economics in Dak Lak" in Agricultural Economics Magazine,

No.5 (2000).

Phan Quc Sng, "Techniques of planting, taking care and processing coffee," Agricultural
Publishing House (1995).

Viet Nam-Netherlands Research Program, "Conference on rural poverty reduction research

from micro approach" (2002).

Viet Nam Economics Journal (15 May 2002).

52
 Annex 1: Research sites
Dak Lak Province

Bun N

Dak Lak

Poverty situation
Table 23 below shows the results of the 2001 poverty survey of the Department of Labour,
Invalids and Social Affairs of Dak Lak province, which used new standards.

Table 23 The poverty situation by district

Total number Poor Poverty
of households households incidence
Cu Mgar 26,826 5,712 21.29%
Buon Don 9,330 3,084 33.05%
Lak 8,682 4,764 54.87%
Whole province 369,714 94,477 25.55%

Table 24 Causes of poverty by district and province-wide (number of households)

Lack of Lack of Lack of Lack of Having Accide Having Having Occupa
experien labour capital product people nts, ill, many tion
ce ion land committed risk disabled non-
to social and old laboure
evils or lazy people rs

Cu Mgar 247 57 2,032 1,031 33 40 338 303 -

Buon Don 180 326 1,472 858 12 12 101 118 12
Lak 423 221 1,961 992 39 55 239 316 8
Whole 6,401 3,991 47,805 21,604 515 988 6,480 6,898 801
province

Results of the survey described in this report show that the main causes of poverty are lack
of funds and productive land. One notable characteristic of poverty in Dak Lak is that the
number of households falling under the poverty line according to the new standards is very
high (out of the total of 94,477 poor households identified in the 2001 survey, 63,310 were
newly redefined as poor as a result of the new government standards used). Clearly, many

53
households close to the poverty line fell below it between 2000 and 2001, whether due to
price cuts, weather conditions, illness or crop loss.

1. Cu Mgar district

This district has the largest coffee plantation area in the province (41,569.6 ha) and was also
the richest district during the period of high coffee prices. It has 13 communes and two
towns (Ea Pok and Quang Phu). The district centre is 12 km far away from Buon Ma Thuot
City. Two of its communes are part of the 135 poverty alleviation program.

Cu Mgar's area is 82,500 ha, of which 70.7% (58,343 ha) is crop plantation land, and 2,799
ha is paddy land. Out of 26,826 households, about 25% belong to the E De ethnic group. In
addition, the district has Man, Tay, Nung, and Han peoples who have immigrated from the
north.

Ea Pok commune

The commune has 13 villages, with 25% of its population being ethnic minorities. Nine of its
villages are administered by the Ea Pok Coffee Company (previously the Ea Pok Farm). The
average land area of ethnic minority households is 1.4 ha/household, compared with 0.8
ha/household for the Kinh. Most land in the commune is used to plant coffee. Paddy land is
very limited at only 194 ha (of which 154 ha are planted with two crops/year and 40 ha with a
single crop); only 10% of households have any paddy land at all. Some households also
grow rubber, cotton (about 100 ha) and other crops.

At present, due to low coffee prices, farmers have destroyed about 60-70 ha of coffee
(mainly in unfavourable coffee-growing areas) to plant annual crops including hybrid maize,
legumes, vegetables, cotton and fruit trees.

The three villages selected for interviews were: Buon Pok, the richest village, having paddy
land and coffee-growing land, and supported by a Danida project, Buon Ea Sut and Buon
Lang, both medium-off villages under the management of the Ea Pok Company.

2. Buon Don district

This district is located near the Cambodian border, and abuts Cu Mgar in the east and Ea
Sp district in the north. It is 20 km northeast of Buon Ma Thuot City. The district has seven
communes (an additional commune was separated from it in 2001), 77 villages (with eight
villages belonging to "zone III", which includes communes in extreme difficulty as classified
by the government). The population is 53,000 people in 9,776 households including 17
different ethnic minority groups, of whom just 13,000 people (2,500 households) are local.

This is a poor district with a large natural area of 141,247 ha. Its Krong Na commune alone
covers an area equal to that of Thai Binh province. The district has a serious shortage of
agricultural land; what land there is is poor quality, with unfavourable weather conditions.
Agricultural land accounts for only 10% of the district's area (12,368 ha), of which coffee
covers 3,500 ha, planted mainly in three communes including Ea Nuol.

Apart from coffee, the district also has great potential for tourism. Industry has not yet been
developed there. Program 135 has been implemented in Krong Na commune for three
years.

Ea Nuol commune

54
From 1996 to 2000, the number of poor households in this commune decreased from 180
(including 9 hungry households) to 36. As a result both of coffee price reductions and new
poverty standards, in 2001, the number of poor households in the commune increased
remarkably to 379 households of a total of 2,145.

The area of the commune is 6,575 ha, of which 62.4% (4,100 ha) is cultivation land,
including 1,100 ha (formerly 1,337 ha) of coffee land. The reduction in coffee land is due to
the removal of coffee trees and to crop transformation. Out of the total area, commercial
coffee production area makes up 960 ha.

The three villages selected for the survey in this commune were Buon Nieng 1, Buon Nieng
2 (both ethnic minority villages) and Hoa Nam 1 (a Kinh village).

3. Lak district

The district has eight communes and one town, and is located 40 km to the southeast of
Buon Ma Thuot City. Five of its communes belong to "zone III" and benefit from program
135. Ethnic minority people account for 64% of the population, of whom over 80% are
M'nong; the rest are E De. These two peoples follow a matriarchal system. Poor households
make up 54.87% of the total population, of whom most are ethnic minorities.

The district is not located in the projected coffee-growing area of the province. Coffee is
planted in three communes with basal red soil, including Dak Phoi. The main crop here is
water paddy, accounting for over 4,000 ha (the rest of the agricultural land is for hybrid
maize). Ethnic minority people also grow water paddy but only to a limited extent.

Dak Phoi commune

Dak Phoi belongs to "zone III", and has 11 villages. The population is mainly local ethnic
minority people. According to data from late 2001, the commune has 792 households of
4,430 people, of whom 90% are M'nong. Only one village (76 households) has immigrants,
from Cao Bang.

The educational level here is low; the person with the highest educational level in the
commune only reached 9th class. Many people in the commune cannot speak Vietnamese.
Total paddy area is 200 ha, of which 70 ha are is double-cropped and 130 ha single-
cropped. This commune has the highest area of red basal soil in the district so also has the
highest level of coffee development in the district. The three villages selected for the survey
in this commune were Buon Paiar (89 households, coffee area 47 ha), Buon Dung (61
households, coffee area 31.5 ha) and Buon Yo Yuk (coffee area 45 ha).

55
 Annex 2: Policy Analysis Matrix (PAM) Framework
1. PAM's concept

Policy Analysis Matrix (PAM) is a tool to analyse policies in terms of their impacts on private
as well as social profitability (costs-benefits) of commodity system - representative chains of
farming, marketing, and processing activities that together produce a marketable product.
The PAM is a compromise between the desire to describe the economy in exacting detail
and the need for insightful policy analysis that operates within inevitable constraints of time
and data availability. The theoretical basic for PAM is the simple general equilibrium model
of international trade rather than some social welfare function. PAM focuses attention on the
identification of efficient patterns of production and prices.
The calculation of private profitability provides information on the competitiveness of
commodity systems at actual market prices. The same computations using social prices
provide information on profitability when commodities and factors are priced at their social
opportunity costs. The divergences - the differences between private and social valuations -
are caused either by policy interventions (in the form of taxes, subsidies, trade restrictions,
and exchange rate distortions) or by failures in commodity and factor markets.
The PAM compares the data from the private and social budgets to facilitate the evaluation
of policy effects and market failures on tradable inputs, domestic resources, and Outputs.
The PAM format, shown in Table 1, contains data on revenues, costs, and profits for an
individual crop at private and social prices.

Table 25 Table 1 The Policy Analysis Matrix

Costs
Revenues Tradable Inputs Domestic Factors Profits
Private Prices A B C D
Social Prices E F G H
Divergences I J K L
Note:
Private profits: D = A-B-C Input transfers: J=B-F
Social profits: H = E-F-G Factor transfers: K=C-G
Output transfers: I=A-E Net transfers: L = D - H or L = I - J - K

The PAM is made up of two accounting identities. One defines profitability, and the other
measures policy effects and market failures, i.e., divergences. Profits, shown by D and H in
the right column, are calculated by subtracting all costs from revenues, in private and social
terms for each respective row. Policy effects and market failures, shown by I, J, K and L in
the bottom row, are calculated as the difference between the private and social values of
outputs and inputs. The divergences represent transfers to or from the producers of the
crop, resulting from policy interventions and market failures affecting revenues, tradable
inputs, or domestic factors. Such transfers may be positive or negative. The net transfer to
producers of a particular crop can be calculated as the aggregate effect of divergences. The
net transfer also is found as the difference between private and social profits for the
commodity system.

The final PAM table is constructed from the private and social budget tables. The top or
private profits row is obtained from the private budget. The middle or social profits row is
obtained from the social budget. The last row, divergences, is obtained by subtracting the
social row from the private row.

56
Relevant PAM Ratios

A further analysis of commodity systems in terms of comparing profitability and efficiency of

different crop systems can be made through using different ratios. The use of ratios is a
convenient method of avoiding the problem of a common numeraire, particularly when the
production processes and outputs are very dissimilar. Several useful ratios that provide
information on private and social profitability can be derived directly from the data in the
policy analysis matrix. Both the numerator and the denominator of each ratio are PAM
entries defined in domestic currency units per physical unit of the commodity. Therefore, the
ratio is a pure number free of any commodity or monetary designation.
The relevant ratios are:

Pr ivateDomesticFactorCosts C
Private Cost Ratio = =
Pr ivate Re venue Pr ivateTradableInputCosts A B

SocialDomesticFactorCosts G
Domestic Resource Cost Ratio = =
Social Re venue SocialTradableInputs E F

Pr ivate Re venue A
Nominal Protection Coefficient = =
Social Re venue E

Pr ivate Re venue Pr ivateTradableInputs A B

Effective Protection Coefficient = =
Social Re venue SocialTradableInputs EF

Pr ivate Pr ofit D
Ratio of Private and Social Profit = =
Social Pr ofit H

NetTransfer L
Subsidy Ratio to Producers = =
Social Re venue E

Private cost and domestic resource cost ratio should be less than 1 to be privately and
socially profitable respectively. Nominal Protection Coefficient greater than 1 shows that the
market price of the output exceeds the social price. The farmer receives an implicit output
subsidy from policies affecting crop prices. As for effective protection coefficient, if this ration
is less than 1,it indicates a tax on producers while if it is more than 1, there is a subsidy
(protection) for the crop.

With respect to the ratio of private and social profit, we should look only for positive numbers
as negative number can be miss-interpreted. This ratio indicates how private profit is
compared to social profit. If this ratio is greater than 1, farmers are subsidized and if it is less
than 1, farmers are taxed.

Subsidy ratios to producers indicate how much net transfer is a ratio of social revenue. If the
ratio is positive, it indicates a subsidy case, and if it is negative, it indicates a case of tax.

2. Building PAM model for coffee in Dak Lak province

57
 I - 0 Table

Current market
price table

Current social Tables estimating current

price table social price

Converted
market price Factors for converting market
price and social price
Interest rate
Inflation
Converted Probability of risk
social price

Budget table of
converted market price

Budget table of
converted social price

PAM Table Table of analysing

indicators

3. Steps in estimating social price of coffee

CIF price of pesticide

(+)

Wholesale
pesticide market
Coffee
farmers (+)

(-) Wholesale coffee

market

DaKlaK province (-)

F.O.B price of coffee

58
 Annex 3: Econometric Models

1. Estimation of the World Demand for Vietnam Coffee from 1984-2001

General form of the demand function used in the analysis:

Q = 0 + 1 *P , or P = a0 + a1*Q (an invert demand function)
Where:
P: Vietnam export price of coffee
Q: Vietnam export quantity of coffee
0 or a0: Intercepts and 1 or a1: regression coefficients (or slope of the demand curve)
The econometric analysis of world demand for Vietnam coffee export is based on the
dataset of 1984-2001 period provided by GSO.

Table 26 Coffee Production & Export of Vietnam and Brazil

Vietnam Coffee Brazil Coffee Output
Year Export Output Export price (1000 ton)
(1000 ton) (US$/ton)
1994 177 1854 1856
1995 248 2400 986
1996 181 2315 1680
1997 392 1270 1410
1998 382 1554 2136
1999 488 1214 1848
2000 734 683 2046
2001 750 660 1788
1994-2001 419 1494 1719
Note: Since almost of Vietnam coffee production is for export, an annual export quantity of Vietnam
coffee is used as a proxy of annual production output.
Source: GSO

Summary of the model estimation

Dependent variable is Vietnam Coffee Export Price in US$/ton.

(Observations used for estimation from 1994 to 2001)
Regressor Coefficient Standard Error T-Ratio P-Value
Intercept 2639.8 207.073 12.748 0.0000
Vietnam Coffee Export in 1000 ton -2.7350 0.4410 -6.202 0.0008
R-Squared: 0.8651; R-Bar-Squared: 0.8426
S.E. of Regression: 264.52; F-statistic: 38.4663; Significance F: 0.00081
Data Source: GSO

Tables above show that all the estimates of concerned coefficients are statistically
significant. The regression result can also be written in mathematical forms as follows:

P = 2639.8 2.7350*Q
or Q = 965.1788 0.3656*P

From the estimated demand function, we can compute the elasticity of world demand for
Vietnam coffee with respect to price of the coffee export E (i.e. the percentage change in the
quantity demanded divided by the corresponding percentage change in its price):

Q = 0 + 1 *P

59
 Q P Q
E= * . Since is the slope of demand curve and it is equal to 1 , then Elasticity
P Q P
of export quantity with respect to own price at point of 2001 is
P
E 2001 = 1 * = -0.3656*(660/750) = -0.3218
Q

Moving along a demand curve from the lowest Q to the highest Q, the price elasticity of
demand will change from - to 0. Within the rage of (- < E < -1) producer revenue
(R=P*Q) is increasing and at the range of (-1 < E < 0) the revenue is decreasing. At the
point of unit-elastic demand (i.e. when E = -1), the revenue reaches a maximum. This
argument can be proved as follows:

Lets Q = 0 + 1 *P and revenue R = P * Q = 0 * P + 1 * P 2

R get Max when dR = 0 + 2 1 * P = Q + 1 * P = 0 ; or R reaches a maximum when
0
Q = 1 * P and P = . Analogically, We can derive the condition for getting a
2 1
maximum export revenue in relation to the price elasticity of demand.
P
We have E = 1 * and R is max when Q = 1 * P and P = 0 . This implies that
Q 2 1
P
when E = 1 * = 1 the producers revenue could have its highest value.
1 * P
In our case, the Vietnam coffee revenue reaches its maximum of US$ 637 million at the
point:

Optimal output Q* = 483 thousand ton

Optimal price P* = 1320 US$/ton

Some Key Indicators derived from the Model of World Demand for Vietnam Coffee (P
= a0 + a1*Q + e)

The estimated model is P' = 2639.8 - 2.7350*Q

1994-01 2001
Observed data:
P: VN Coffee Export Price in US$/ton 1494.0 660.0
Q: VN Coffee Export Volume in 1000 ton 419.0 750.0
R: Vietnam Coffee Export Revenue in mill. US$; R = P*Q 625.9 495.0
Derived Elasticity:
EPQ: Elasticity of P with respect to Q1, EPQ = (a1*Q)/P -0.7670 -3.1080
P P
EQ : Elasticity of Q1 with respect to P; EQ = P/(a1*Q) -1.3038 -0.3218
Optimal Level for Vietnam Coffee Export, holding other else unchanged:
Q*: Optimal level of Q; Q* = -0.5*a0/a1 482.6
* * *
P : Optimal level of P; P = - a1*Q 1319.9
* * * *
R : Optimal Export Revenue of Vietnam Coffee; R = P Q 637.0
Source: Estimation based on 1994-2001 data of GSO

60
2. Estimation of the relationship between Vietnam Coffee Export Price and Coffee
Outputs of Vietnam and Brazil using empirical data of 1994-2001 period.

General form of the function used is P = a 0 + a1 * Q1 + a 2 * Q2

Where:
P: Vietnam export price of coffee in US$ per ton;
Q1 & Q2: Vietnam and Brazil coffee output in 000 ton;
a 0 : Intercepts and a1 & a 2 : regression coefficients (or slope of the demand curve)

This econometric analysis is based on the GSO and ICO datasets of 1994-2001 period.

Summary of the model estimation

Dependent variable is Vietnam Coffee Export Price in US$/ton.

(Observations used for estimation are from 1994 to 2001)
Regressor Coefficient Standard Error T-Ratio P-Value
Intercept 3151.02 453.708 6.945 0.0010
Vietnam Coffee Output in 1000 ton -2.51096 0.4579 -5.484 0.0028
Brazil Coffee Output in 1000 ton -0.35207 0.2812 -1.2522 0.2659
R-Squared: 0.8973; R-Bar-Squared: 0.8562
S.E. of Regression: 252.83; F-statistic: 21.8379; Significance F: 0.00338
Source: Estimation based on 1994-2001 data of GSO

Some Key Indicators derived from the Model of Relationship between Vietnam Coffee
Export Price & Coffee Output of Vietnam and Brazil
(P = a0 + a1*Q1 +a2*Q2 + e)

The estimated model is P' = 3151.02 2.51096*Q1 - 0.35207*Q2

1994-01 2001
Observed data:
P: Vietnam Coffee Export Price in US$/ton 1494.0 660.0
Q1: Vietnam Coffee Output in 1000 ton 419.0 750.0
Q2: Brazil Coffee Output in 1000 ton 1718.7 1787.6
R: Vietnam Coffee Revenue, million US$; R = P*Q1 625.9 495.0
Derived Elasticity of Vietnam Coffee Price wrt the Own- or Cross- Output, and vice versa :
EPQ1: Elasticity of P with respect to Q1, EPQ1 = (a1*Q1)/P -0.7042 -2.8534
Q2 Q2
EP : Elasticity of P with respect to Q2; EP = (a2*Q2)/P -0.4050 -0.9536
P P
EQ1 : Elasticity of Q1 with respect to P; EQ1 = P/(a1*Q1) -1.4202 -0.3505
P P
EQ2 : Elasticity of Q2 with respect to P; EQ2 = P/(a2*Q2) -2.4689 -1.0487
Optimal level for Vietnam Coffee Trade, holding Q2 of 2001 level & other else unchanged:
Q1*: Optimal level of Q1; Q1* = (- a0 - a2*Q2)/(2*a1) 502
* *
P : Optimal level of P; P = - a1*Q1 = 1261
* * * *
R : Optimal level of R; R = P Q1 633

61
Export prices of Vietnamese coffee as a function of changes in coffee outputs of Viet Nam
and Brazil
P = 3151.02 - 2.51096*Q1 - 0.35207*Q2
Different options for Brazil coffee output as % of 2001 level
-40% -30% -10% -5% 0% 5% 10% 20% 25%
1073 1251 1609 1698 1788 1877 1966 2145 2235
-40% 450 1643 1581 1455 1423 1392 1360 1329 1266 1234
-35% 488 1549 1486 1361 1329 1298 1266 1235 1172 1140
Different -30% 525 1455 1392 1266 1235 1203 1172 1140 1078 1046
options for -25% 563 1361 1298 1172 1141 1109 1078 1046 983 952
Vietnam -20% 600 1267 1204 1078 1047 1015 984 952 889 858
coffee Output -15% 638 1173 1110 984 952 921 889 858 795 764
as % of -10% 675 1079 1016 890 858 827 795 764 701 669
2001 level 0% 750 890 827 701 670 638 607 576 513 481
5% 788 796 733 607 576 544 513 481 418 387
10% 825 702 639 513 482 450 419 387 324 293
Optimal VN coffee Price 1387 1355 1292 1277 1261 1245 1229 1198 1182
Optimal VN coffee Output 552 540 515 508 502 496 490 477 471
Optimal VN Export revenue 766 731 665 649 633 617 602 571 557
Note: Price in US$/ton ; Output in 1000 ton and Revenue in million US$;
Q1: Vietnam coffee output and Q2: Coffee output of Brazil.

62