1. Cover Page<br />Title: <br />Coffee, Cooperation and Competition: a comparative study between Colombia and Vietnam<br />Authors (main researchers):<br />Maria-Alejandra Gonzalez-Perez<br />Adriana Roldán-Pérez<br />Pham Thu Huong<br />Dao Ngoc Tien<br />Research assistants (Colombia):<br />Catalina Tabares<br />Melissa Eusse<br />Franz Xaver Riegler<br />Stephanie Riegler<br />Research assistant (Vietnam):<br />Nguyen Thu Hang<br />Institutions: <br />EAFIT University (Colombia)<br />Foreign Trade University (Vietnam)<br />Date: April 2nd 2009<br />Acknowledgements<br />Funding: <br />EAFIT University<br />FTU UniversityUNCTAD<br />Institutional Affiliation:<br />Department of International Business at EAFIT University<br />Foreign Trade University (FTU)<br />Other:<br />Eamonn McDonagh and Ignacio Mastroleo<br />Abstract<br />This cross-country study compares two of the major coffee export-oriented countries (Colombia and Vietnam) in terms of: <br />Infrastructure<br />Players: roles and reactions to external shocks<br />Technology adoption at different stages of production<br />Added value<br />Positioning at both domestic and global markets <br />Internationalisation patterns<br />Marketing and branding innovation<br />Regulatory frameworks and policy environment<br />Using value chain analysis as primary methodology, this research identifies links and dynamics in the value chain in both Colombia and Vietnam that have been developed in the coffee industry in other to improve competitiveness, increase sustainability and respond to market demands.<br />This study also explores considerations at the production, policy making and marketing levels towards satisfying niche markets such as speciality coffees, and socially, labour and environmentally responsible trade. Furthermore it identifies current patterns of cooperation and competition threats between these two countries. <br />Table of Contents<br /> TOC quot;
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Cover Page PAGEREF _Toc226471173 1<br />Acknowledgements PAGEREF _Toc226471174 2<br />Abstract PAGEREF _Toc226471175 3<br />Table of Contents PAGEREF _Toc226471176 4<br />List of Figures PAGEREF _Toc226471177 7<br />List of Tables PAGEREF _Toc226471178 8<br />Weights and Measures PAGEREF _Toc226471179 9<br />Definitions, acronyms and abbreviations PAGEREF _Toc226471180 9<br />1.Introduction PAGEREF _Toc226471181 10<br />1.1.Rationale of research PAGEREF _Toc226471182 11<br />1.2.Research objectives PAGEREF _Toc226471183 12<br />1.2.1.General objective PAGEREF _Toc226471184 12<br />1.2.2.Specific objectives PAGEREF _Toc226471185 12<br />1.3.Research methodology PAGEREF _Toc226471186 13<br />2.Literature review on Global Value Chain of coffee PAGEREF _Toc226471187 15<br />2.1.Theory on Global Value Chain (GVC) PAGEREF _Toc226471190 15<br />2.1.1.Introduction to Value Chain PAGEREF _Toc226471191 15<br />2.1.2.Global Commodity Chains (GCC) PAGEREF _Toc226471192 17<br />2.1.2.1.Producer-Driven and Buyer-Driven Commodity Chains PAGEREF _Toc226471193 18<br />2.1.3.Value Chain Analysis (VCA) PAGEREF _Toc226471194 19<br />2.1.3.1.Definition PAGEREF _Toc226471195 19<br />2.1.3.2.Methodological aspects of VCA PAGEREF _Toc226471196 21<br />2.1.4.Governance PAGEREF _Toc226471197 22<br />2.1.5.Barriers to entry and rent PAGEREF _Toc226471198 23<br />2.1.6.Upgrading in value chains PAGEREF _Toc226471199 24<br />2.2.Overview of Coffee Market in the World PAGEREF _Toc226471200 25<br />2.2.1.World Coffee Production PAGEREF _Toc226471201 25<br />2.2.2.Production by type of coffee PAGEREF _Toc226471202 26<br />2.2.3.Coffee Producing Countries PAGEREF _Toc226471203 28<br />2.2.4.Stocks in Producing Countries PAGEREF _Toc226471204 28<br />2.2.5.World Coffee Exports PAGEREF _Toc226471205 29<br />2.2.6.World Coffee Consumption PAGEREF _Toc226471206 33<br />2.2.6.1.Traders and Retailers: PAGEREF _Toc226471207 37<br />2.2.7.International Coffee Organisation (ICO) and coffee prices PAGEREF _Toc226471208 38<br />2.2.7.1.ICO Indicator Prices PAGEREF _Toc226471209 38<br />2.3.Mapping global value chain of coffee PAGEREF _Toc226471210 40<br />3.Analysis on Colombia’s and Vietnam’s Participation in Coffee Value Chain PAGEREF _Toc226471211 43<br />3.1.Vietnam’s participation on coffee’s GVC PAGEREF _Toc226471212 43<br />3.1.1.Background PAGEREF _Toc226471213 43<br />3.1.1.1.Natural conditions PAGEREF _Toc226471214 43<br />3.1.1.2.Infrastructure PAGEREF _Toc226471215 45<br />3.1.1.3.Policy and legal frameworks PAGEREF _Toc226471216 46<br />3.1.2.Vietnam’s position in global coffee market PAGEREF _Toc226471217 48<br />3.1.2.1.Export output PAGEREF _Toc226471218 49<br />3.1.2.2.Export turnover PAGEREF _Toc226471219 49<br />3.1.2.3.Export product structure PAGEREF _Toc226471220 50<br />3.1.2.4.Export prices PAGEREF _Toc226471221 51<br />3.1.2.5.Export markets PAGEREF _Toc226471222 53<br />3.1.3.Actors PAGEREF _Toc226471223 55<br />3.1.3.1.Farmers PAGEREF _Toc226471224 55<br />3.1.3.2.The middlemen PAGEREF _Toc226471225 57<br />3.1.3.3.Processing or exporting companies PAGEREF _Toc226471226 57<br />3.1.3.4.Other players PAGEREF _Toc226471227 58<br />3.1.3.4.1.The Vietnam Coffee and - Cocoa Association (VICOFA) PAGEREF _Toc226471228 58<br />3.1.3.4.2.Buon Ma Thuot Coffee Exchange Center (BCEC) PAGEREF _Toc226471229 59<br />3.1.3.5.Vietnamese Instant coffee market PAGEREF _Toc226471230 60<br />3.1.4.Case studies of Vietnam’s coffee companies PAGEREF _Toc226471231 62<br />3.1.4.1.Vinacafe Buon Ma Thuot PAGEREF _Toc226471232 62<br />3.1.4.1.1.History of the company PAGEREF _Toc226471233 62<br />3.1.4.1.2.Company position in the domestic and global value chains PAGEREF _Toc226471234 63<br />3.1.4.1.3.Domestic value chain PAGEREF _Toc226471235 63<br />3.1.4.1.4.Vinacafe’s global value chain PAGEREF _Toc226471236 64<br />3.1.4.1.5.Technology and added values at each stage PAGEREF _Toc226471237 67<br />3.1.4.1.6.Internationalization and marketing innovation PAGEREF _Toc226471238 67<br />3.1.4.1.7.Plans for the future PAGEREF _Toc226471239 67<br />3.1.4.2.Phuong Vy Coffee Company PAGEREF _Toc226471240 68<br />3.1.4.2.1.History of the company PAGEREF _Toc226471241 68<br />3.1.4.2.2.Company position in the domestic and global value chains PAGEREF _Toc226471242 68<br />3.1.4.2.3.Domestic value chain PAGEREF _Toc226471243 69<br />3.1.4.2.4.Phuong Vy’s global value chain PAGEREF _Toc226471244 69<br />3.1.4.2.5.Technology and added values at each stage PAGEREF _Toc226471245 70<br />3.1.4.2.6.Internationalization and marketing innovation PAGEREF _Toc226471246 71<br />3.2.Colombian’s participation on coffee’s GVC PAGEREF _Toc226471247 72<br />3.2.1.Colombian’s coffee industry environment PAGEREF _Toc226471248 72<br />3.2.1.1.Natural conditions PAGEREF _Toc226471249 73<br />3.2.1.2.Infrastructure PAGEREF _Toc226471250 74<br />3.2.1.3.The regulatory framework for coffee PAGEREF _Toc226471251 77<br />3.2.2.Position in international markets PAGEREF _Toc226471252 78<br />3.2.2.1.Coffee production in Colombia PAGEREF _Toc226471253 78<br />3.2.2.2.Colombia’s Coffee Exports PAGEREF _Toc226471254 80<br />3.2.2.3.Domestic coffee consumption in Colombia PAGEREF _Toc226471255 82<br />3.2.2.4.Actors PAGEREF _Toc226471256 84<br />3.2.2.4.1.Coffee growers PAGEREF _Toc226471257 84<br />3.2.2.4.2.National Coffee Federation of Colombia PAGEREF _Toc226471258 85<br />3.2.2.4.3.Coffee processors PAGEREF _Toc226471259 85<br />3.2.2.4.4.Coffee exporters PAGEREF _Toc226471260 87<br />3.2.2.4.5.The Colombian State PAGEREF _Toc226471261 87<br />2.1.3.Internationalization and market innovation PAGEREF _Toc226471264 88<br />2.1.4.Two Case Studies of Colombian Companies PAGEREF _Toc226471265 91<br />2.1.4.1.The National Coffee Federation PAGEREF _Toc226471266 91<br />2.1.4.2.Colcafé S.A. PAGEREF _Toc226471267 93<br />2.1.5.Colombian’s participation on coffee GVC PAGEREF _Toc226471268 96<br />4.Comparative Analysis on participation in coffee’s GVC PAGEREF _Toc226471269 97<br />4.1.Coffee Industry Environment PAGEREF _Toc226471270 97<br />4.2.Position in global markets PAGEREF _Toc226471271 98<br />4.2.1.Coffee Exports PAGEREF _Toc226471272 98<br />4.2.2.Domestic coffee consumption in Colombia and Vietnam PAGEREF _Toc226471273 100<br />4.3.Vietnam’s and Colombia’s participation on coffee’s GVC PAGEREF _Toc226471274 102<br />5.Conclusions and recommendations PAGEREF _Toc226471275 103<br />5.1.Summary PAGEREF _Toc226471276 103<br />5.2.Cooperation and competition between Colombia and Vietnam PAGEREF _Toc226471277 108<br />5.3.Recommendations to Colombia PAGEREF _Toc226471278 110<br />5.4.Recommendations to Vietnam PAGEREF _Toc226471279 111<br />References PAGEREF _Toc226471280 113<br />Appendices PAGEREF _Toc226471281 119<br />Developed research instrument PAGEREF _Toc226471282 119<br />Basic Information PAGEREF _Toc226471283 119<br />Agreements PAGEREF _Toc226471284 119<br />Interview and observation protocol PAGEREF _Toc226471285 119<br />List of Figures <br /> TOC quot;
Figurequot;
Figure 1: Porter (1985)'s representation of a value chain PAGEREF _Toc226442803 15<br />Figure 2: World coffee production by region PAGEREF _Toc226442804 26<br />Figure 3: Value added created at stage of the coffee GVC. PAGEREF _Toc226442805 41<br />Figure 4: Global value chain of coffee PAGEREF _Toc226442806 42<br />Figure 5: Coffee growing area in Vietnam PAGEREF _Toc226442807 44<br />Figure 6: Vietnam exporting coffee situation (1993-2007) PAGEREF _Toc226442808 49<br />Figure 7: Export price of Vietnam coffee (1995-2007) (In USD) PAGEREF _Toc226442809 51<br />Figure 8: Exports markets for Vietnamese coffee PAGEREF _Toc226442810 53<br />Figure 9: Vietnam's participation of coffee GVC PAGEREF _Toc226442811 54<br />Figure 10: Domestic value chain of Vinacafe Buon Ma Thuot PAGEREF _Toc226442812 64<br />Figure 11: Vinacafe Buon Ma Thout's GVC PAGEREF _Toc226442813 66<br />Figure 12: Cost and profits (Vinacafe Buon Ma Thuot) PAGEREF _Toc226442814 67<br />Figure 13: Phuong Vy as a wholesaler and as a roaster PAGEREF _Toc226442815 69<br />Figure 14: Phyong Vy as a trademark PAGEREF _Toc226442816 70<br />Figure 15: Coffee production in Colombia (1980-2007) PAGEREF _Toc226442817 79<br />Figure 16: Colombian national production of instant, roasted and ground coffee PAGEREF _Toc226442818 80<br />Figure 17: Percentage of coffee exports of Colombia (1991-2006) PAGEREF _Toc226442819 81<br />Figure 18: Domestic coffee consumption in Colombia (2003-2007) PAGEREF _Toc226442820 83<br />Figure 19: Roasted coffee market share in Colombian companies (2008) PAGEREF _Toc226442821 86<br />Figure 20: Market share of Colombian companies in the instant coffee market (2008) PAGEREF _Toc226442822 86<br />Figure 21: Percentage of market share of coffee exporters in Colombia (1993-2007) PAGEREF _Toc226442823 87<br />Figure 22: Types of speciality coffee from Colombia PAGEREF _Toc226442824 89<br />Figure 23: Structure of the NCF PAGEREF _Toc226442825 92<br />Figure 24: Colombian’s participation on coffee GVC PAGEREF _Toc226442826 96<br />List of Tables<br /> TOC quot;
Tablequot;
Table 1: Overview of coffee world production by type 2002/03 - 2007/08 (in million bags) PAGEREF _Toc226471286 27<br />Table 2: Coffee producing countries PAGEREF _Toc226471287 28<br />Table 3: Opening stocks in producing countries by type, crop years 2003/04 - 2007/08 (in 000s of bags) PAGEREF _Toc226471288 29<br />Table 4: World coffee exports, by value and volume PAGEREF _Toc226471289 30<br />Table 5: Overview of world exports by type: Coffee years 2002/03-2006/07 (in 000s of bags) PAGEREF _Toc226471290 32<br />Table 6: Volume and value of export by group of coffee (volume in million bags, value in million USD) PAGEREF _Toc226471291 33<br />Table 7: Consumption in importing countries/areas 2002/03 - 2006/07 (in 000's of bags) PAGEREF _Toc226471292 34<br />Table 8: Domestic consumption in coffee producing countries. Crop year 2007/08 (estimated). Figures are rounded up to nearest '000 PAGEREF _Toc226471293 35<br />Table 9: Per-capita coffee consumption in main importing countries (kg/person) PAGEREF _Toc226471294 36<br />Table 10: Per-capita coffee consumption in main producing countries PAGEREF _Toc226471295 36<br />Table 11: Concentration of multinational corporations in the international coffee industry (2006) PAGEREF _Toc226471296 37<br />Table 12: ICO Indicators Price. Annual average 2001-2008 (US cents per pound) PAGEREF _Toc226471297 39<br />Table 13: Exporting output and turnover of Vietnamese coffee PAGEREF _Toc226471298 48<br />Table 14: Vinacafe Buon Ma Thuot's coffee export turn over and quantity PAGEREF _Toc226471299 65<br />Table 15: Vinacafe Boun Ma Thout's coffee export market share (2001-2007). PAGEREF _Toc226471300 65<br />Table 16: Classification of coffee beans depending on the size of coffee beans PAGEREF _Toc226471301 66<br />Table 17: Coffee producing provinces (departments) in Colombia PAGEREF _Toc226471302 75<br />Table 18: Coffee production in terms of the relationship between total area sown vs. holding size range PAGEREF _Toc226471303 76<br />Table 19: Number of coffee threshing machines in Colombia (2004-2005) PAGEREF _Toc226471304 76<br />Table 20: Number of coffee roasters in Colombia PAGEREF _Toc226471305 77<br />Table 21: Coffee production 1980-2007 (in 000s bags) PAGEREF _Toc226471306 78<br />Table 22: Colombian coffee exports (1994-2007) PAGEREF _Toc226471307 81<br />Table 23: Main markets for Colombia coffee (000s USD) PAGEREF _Toc226471308 82<br />Table 24: Consumption per-capita in main producing countries (kg/year) PAGEREF _Toc226471309 83<br />Table 25: Coffee consumption with regional preferences (1987, 1996, 2007) PAGEREF _Toc226471310 84<br />Table 26: Comparison between Colombia’s and Vietnam’s coffee industry using the observation protocol PAGEREF _Toc226471311 103<br />Weights and Measures<br />1 bag of coffee = 60 kilogram = 132.3 pound<br />1 ton = 16.67 bags<br />1 ton = 1,000 kilogram<br />1 hectare = 10,000 m2<br />Definitions, acronyms and abbreviations<br />BMT: Boun Ma Thuout<br />Calendar Year: January 1st to December 31st.<br />Coffee Year: It is recognized as being the International Coffee Organisation’s accounting period from October 1st to September 30th. Coffee harvest statistics are usually measured using this period.<br />Green coffee bean: coffee in the naked bean form before roasting<br />GBE: Green Bean Equivalent<br />HCM City: Ho Chi Minh City<br />ICO: International Coffee Organisation<br />MNC: Multinational Corporation<br />NA: Non-Available<br />NCF: National Coffee Federation of Colombia<br />USD: United States’ Dollars<br />Introduction<br />This cross-country study aims to compare two of the major coffee export-oriented countries (Colombia and Vietnam) in terms of: <br />Infrastructure<br />Players: roles and possible reactions to external shocks<br />Technology adoption at different stages of production<br />Added value<br />Positioning at both domestic and global markets <br />Internationalisation patterns<br />Marketing and branding innovation<br />Regulatory frameworks and policy environment<br />Using value chain analysis as primary methodology, this research identifies links and dynamics in the value chain in both Colombia and Vietnam that have been developed in the coffee industry in other to improve competitiveness, increase sustainability and respond to market demands.<br />This study also explores considerations at the production, policy making and marketing levels towards satisfying niche markets such as speciality coffees, and socially, labour and environmentally responsible trade. Furthermore it identifies current patterns of cooperation and competition threats between these two countries. <br />Rationale of research<br />This project contributes to our professional development in the sense that we will share expertise and knowledge in areas such as: the coffee industry, development strategies and value chain methodology. This cross-country study allowed us to design research instruments that will potentially be used in other coffee-producing countries, and other agricultural commodities.<br />Teaching and Research on Trade, Investment and Development:<br />Coffee is one of the most traded commodities in the world. Colombia and Vietnam are amongst the largest coffee producers relied on foreign markets. For both countries coffee production is a booster of rural development, and the livelihood of thousands of families depends on the coffee industry. However, the growth rate and processes in the production and the transformation of coffee have been different in both countries. With this research we aimed to explore the context, players, stages and features to explain the differences between these countries.<br />The results of this research will inform teaching, and will allow us to develop a methodology for comparative studies amongst developing countries in different agricultural sectors.<br />Policy making:<br />It is expected that both the research process and results contributes to the understanding of context and processes linked to the coffee industry in terms of socio-economic development. This research allows us to compare development policies in both countries and identify regulatory mechanisms that facilitate economic and social sustainability in this industry.<br />EAFIT University and FTU:<br />We decided to work together on this project to share experience and knowledge in the coffee industry and development issues. Colombia and Vietnam are coffee producers and exporters. Although they produce different types of coffee, they have implemented diverse strategies in order to be more competitive in domestic and foreign markets. Both Universities have research experience in this topic linked to international trade and development.<br /> Research objectives<br />General objective<br />To develop a methodology for comparative studies amongst developing countries in different agricultural sectors, while contributing to the understanding of context and processes linked to the coffee industry in terms of socio-economic development. <br />Specific objectives<br />To identify links and dynamics in the value chain in both Colombia and Vietnam that have been developed in the coffee industry in other to improve competitiveness, increase sustainability and respond to market demands.<br />To explore considerations at the production, policy making and marketing levels towards satisfying niche markets such as speciality coffees, and socially, labour and environmentally responsible trade. <br />To identify current patterns of cooperation and competition threats between these two countries. <br />To explore the context, players, stages and features to explain the differences between Colombia and Vietnam.<br />To design a research instrument that will potentially be used in other coffee-producing countries, and other agricultural commodities.<br />To share expertise and knowledge in areas such as: the coffee industry, development strategies and value chain methodology. <br />To inform teaching on international development related areas. <br />To compare development policies in both countries and identify regulatory mechanisms that facilitates economic and social sustainability in this industry.<br />Research methodology<br />In order to compare coffee industry in Vietnam and Colombia, both secondary and primary information was used. First of all, data from various sources on the coffee industry were collected in both Colombia and Vietnam. Secondary data includes company and industry reports, books, academic papers, articles, databases, and websites related to coffee industry in both two countries. Since there is no evidence of a previous comparative study on these two countries, the research was designed mainly focusing on empirical data collection of primary data in both Vietnam and Colombia. Value Chain Analysis (Dolan & Humphrey, 2000; Gereffi, 1999; Gereffi, Humphrey & Sturgeon, 2005; Gereffi & Kaplinski, 2001; Humphrey & Schmitz, 2001; Kaplinsky 2000; Kaplinsky & Morris, 2000; Sturgeon, 2000) was chosen as the primary methodology to choose the potential sample, and to design an observation protocol which was main research instrument of this survey. This observation protocol serves as a detailed guide for non-structure interviews, and as a check list of key aspects to be observed. It is critical to mention that the instrument needed to be flexible in order to adapt to different type of research participants, and different geographical locations. <br />The observation protocol was designed based on both literature on the coffee industry and secondary data. The initial version of the protocol consisted in a list of categories to be observed. This list went through a rigorous process of refining and complementing during the study. The instrument is added at the end of this report.<br />Field trips were conducted both in Colombia and Vietnam. In- depth interviews with key players in both in coffee industries were selected. These research participants include general directors, managing directors, export executives, marketing executives and farmers from some coffee manufacturers, export companies and the associations for coffee growers. The field work in Colombia was conducted in Antioquia coffee region and in Medellin between October 2008 and January 2009. The field work in Vietnam took place during February 2009 in the locations: Hanoi, Hochiminh and Buonmethuot. <br />Research participants were carefully chosen aiming to have a representative from each aspect of the value chain. <br />The objective of the field work was to find out (i) the main features of the coffee industry in each country; (ii) the differences between the coffee industry in each country and (iii) the participation of each player and each country in coffee global value chain. <br />Immediately after the field work, a process of data analysis took place. The observation protocol and its categories served to guide the qualitative analysis phase of this research. From the data analysis, two case studies were written for each country to illustrate with further details the participation of specific players in the value chain. Although, this research has limitations in terms of geographical scope (it did not sample all the coffee regions in both countries, and it did not interview all the main players of the industry in both countries), it certainly provides a comparative overview of the coffee industry in both countries which it was previously unavailable. It is expected the same methodology and the same research instrument could be used to compare other coffee producing countries. <br />Literature review on Global Value Chain of coffee<br />Theory on Global Value Chain (GVC)<br />Introduction to Value Chain<br />As a starting point it is important to outline the value chain concept. According to Michael Porter, a value chain “disaggregates a firm into its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation” (Porter, 1985). This value chain allows to diagnose the competitive advantage of a firm or industry and to enhance this advantage by tailoring the value chain (Porter, 1985). Nevertheless, the value chain concept has evolved during the years since Porter’s definition.<br />In the narrow meaning, a value chain includes the range of activities performed within a firm to produce a certain output. It refers to the work on Porter (1985) on competitive advantages. Porter has utilized the framework of value chains to assess how a firm should position itself in the market and in the relationship with suppliers, buyers and competitors.<br />Figure SEQ Figure ARABIC 1: Porter (1985)'s representation of a value chain<br />Source: Porter, 1985<br />The ‘broad’ approach to value chain looks at the complex range of activities implemented by various actors (primary producers, processors, traders, service providers, etc) to bring a raw material to the retail of the final product. The ‘broad’ value chain starts from the production system of the raw materials and will move along the linkages with other enterprises engaged in trading, assembling, processing, etc. The broad approach does not only look at the activities implemented by a single enterprise. Rather, it includes all its backward and forward linkages, until the level in which the raw material is produced will be linked to the final consumers.<br />In a more contemporary sense, a simple value chain could be defined as the description of a full range of activities that are necessary to carry a product or service from conception, through the various production stages (including physical transformation and other producer services), distribution to the final consumer, and removal after its use. Nonetheless, in real life applications, value chains tend to be more complex, involving several producers, creating manifold links within the value chain. Therefore it can appear that one value chain may be composed of several smaller value chains (Kaplinsky & Morris, 2001).<br />As noted by Korzeniewicz and Smith (2000), in order to profit from globalisation a relative strength of political progress and institutional configurations of a state is necessary, as well as structural forces (Korzeniewicz & Smith, 2000). However, the distribution of the income generated by globalisation is not distributed in an evenly manner among the countries that participate in the value chain. Thus countries may increase their participation in global trade and though experience decline in their relative income shares (Kaplinsky, 2000).<br />In the context globalisation, the word fragmentation is used in order to depict the physical separation of the elements of the production process, considering the international separation of production as a new phenomenon (Arndt and Kierkowski, 2001). According to Feenstra (1998) this “disintegration of production” is highly connected with the “integration of trade” in the global economy.<br />A commodity chain is “a network of labour and production processes whose end result is a finished commodity” (Hopkins & Wallerstein, 1986: 159). True commodity chains may be defined as those in which basic agricultural products are grown, processed and marketed. Those are usually driven by the commodity traders (Gibbon, 2001). Nevertheless, commodity chain may also be buyer or producer-driven. (Gereffi, 1994).<br />The global commodity chain concept was developed by Gereffi in the 1990s, and attached the value-added chain concept to the global organisation of industries (Gereffi & Korzeniewicz, 1994). The value-added chain refers to “the process by which technology is combined with material and labour inputs, and then processed inputs are assembled, marketed and distributed” (Kogut, 1985: 15). In this context, a firm may constitute one link or be vertically integrated (Kogut, 1985). <br />Global Commodity Chains (GCC)<br />Global commodity chains (GCC) is an analytical approach to understanding the mechanisms of trade. This approach was developed primarily for the analysis of industrial commodities from production to consumption. Gereffi (1994) defines GCCs as “systems that give rise to particular patterns of coordinated international trade, rooted in transnational production systems” (Gereffi, 1994: 215). GCCs have three dimensions; (a) an input-output structure; (b) a territoriality; and (c) a governance. The idea of GCC was first introduced by Hopkins & Wallerstein (1986) who referred them as “a set of inter-organisational networks clustered around one commodity or product, linking households, enterprises, and states to one another within the world-economy” (Gereffi, Korzeniewicz & Korzeniewicz, 1994:2). <br />Supply chains are central to the GCC analysis. Urminsky (2005) identifies three unequal relationships in supply chains; first, the relationship between buyer and supplier, which in general favours multinational companies with suppliers having little chance to negotiate their contracts constantly receiving pressures to cut costs; second, between management and workers; and third, states and multinationals, expressed in the tendency of TNCs to displace the state and assume the role of labour inspectors through the adoption of private mechanisms. <br />A variation, the filière (chain) tradition was developed by researchers at the Institut National de la Recherché Agronomique (INRA) and the Centre Internationale en Recherché Agronomique pour le Developpement (CIRAD) as an analytical tool applied mostly to agricultural commodities such as rubber, cotton, coffee and cocoa from the former French colonies, generally in Africa (Raikes et al. 2000). The filière approach, rather than a theory, is a practical tool of analysis for applied research (Reike et al, 2000) focused on the technical side of commodity flows. It does not focus on the role of social actors within the chain. <br />Producer-Driven and Buyer-Driven Commodity Chains<br />Producer-driven commodity chains are defined by Gereffi (1994) as those industries in which transnational corporations or other large integrated industrial enterprises control the production system, and the control is exercised by the administrative headquarters of TNCs (Gereffi, 1994; Humphrey, 2003; Sturgeon, 2002). In producer-driven commodity chains barriers of entry are determined by capital and technology within production, and by the ability to co-ordinate top-down and bottom-up linkages between suppliers and retailers.<br />Buyer-driven commodity chains refer to those industries in which brand-name merchandisers, trade companies and retailers have a central role in decentralised production networks in a diverse range of exporting countries generally located in so-called developing countries (Gereffi, 1994:216). <br />In a buyer-driven commodity chain the control over production and distribution is wielded by firms that focus on design and marketing. In other words, buyer-driven commodity chains operate in a more decentralised way than producer driven commodity chains, and they are a result of a global trend of geographic expansion and integration of distribution, marketing and consumption (Korzeniewicz, 1995). <br />Buyer-driven commodity chains are dependent on brands and marketing for market entry. Therefore, brand value and the consolidation of brands in consumer markets play a critical role (Gereffi, 1994).<br />Value Chain Analysis (VCA)<br />Definition<br />Value Chain Analysis (VCA), or commodity chain analysis, disaggregates the global structure of fabrication, trade and consumption of commodities and allows identifying the actors and the geographical division (Tuvhag, 2008).<br />Firstly, at its most basic level, a value-chain analysis systematically maps the actors participating in the production, distribution, marketing, and sales of a particular product (or products). This mapping assesses the characteristics of actors, profit and cost structures, and flows of goods throughout the chain, employment characteristics, and the destination and volumes of domestic and foreign sales (Kaplinsky & Morris 2001). Such details can be gathered from a combination of primary survey work, focus groups, PRAs, informal interviews, and secondary data.<br />Second, value-chain analysis can play a key role in identifying the distribution of benefits of actors in the chain. That is, through the analysis of margins and profits within the chain, one can determine who benefits from participation in the chain and which actors could benefit from increased support or organisation. This is particularly important in the context of developing countries (and agriculture in particular), given concerns that the poor in particular are vulnerable to the process of globalization (Kaplinsky & Morris 2001). One can supplement this analysis by determining the nature of participation within the chain to understand the characteristics of its participants.<br />Third, value-chain analysis can be used to examine the role of upgrading within the chain. Upgrading can involve improvements in quality and product design that enable producers to gain higher-value or through diversification in the product lines served. An analysis of the upgrading process includes an assessment of the profitability of actors within the chain as well as information on constraints that are currently present. Governance issues play a key role in defining how such upgrading occurs. In addition, the structure of regulations, entry barriers, trade restrictions, and standards can further shape and influence the environment in which upgrading can take place.<br />Finally, value-chain analysis can highlight the role of governance in the value-chain. Governance in a value-chain refers the structure of relationships and coordination mechanisms that exist between actors in the value-chain. Governance is important from a policy perspective by identifying the institutional arrangements that may need to be targeted to improve capabilities in the value-chain, remedy distributional distortions, and increase value-added in the sector. Here a distinction is made between two types of governance: those cases where the coordination is undertaken by buyers (‘buyer-driven commodity chains’) and those in which producers play the key role (‘producer-driven commodity chains’).<br />Value Chain analysis has three key elements, which are defined as following: (a) Barriers to entry and rent, (b) Governance, and (c) Systemic efficiency (in opposition to point efficiency, meaning that the links of the complex value chain need to be integrated in order to turn them efficient) (Kaplinsky, 2000). Barriers to entry and rent as well as the governance factor will be explained in more detail in other sections of this document. <br />VCA allows identifying the determinants of income distribution within and between the countries that participate in global value chains. This is allowed by a number of reasons: The VCA focuses on the dynamics of rent; therefore it transcends different economic branches and sectors. Only through a full view of the whole value chain the links or segments within it with high or growing rent can be identified. Through this analysis the “rent-rich activities” can be traced with greater ease. Besides, the global focus of the VCA observes global dynamics of returns, not only on a national level. This allows identifying opportunities to increased income more accurately than an analysis on purely national level (Kaplinsky, 2000).<br />Methodological aspects of VCA<br />There are several methodological aspects that have to be taken into account when realizing value chain analysis (Kaplinsky & Morris, 2001). First, the adequate point of entry must be chosen, as it defines the chain or chains that is or are the subject of the analysis in accordance with the objective of the study (which could be the global distribution of income, retailers, independent buyers, key producers, commodity producers, sub-suppliers, small farms and firms, among many others)(Kaplinsky & Morris, 2001).<br />The following aspect is referred to mapping value chains, where the variables which are the object of the study are measured. As well product positioning and key success factors in final markets are aspects of high importance, as global markets show key characteristics (or critical success factors) which are derived from their segmentation. Another methodological feature to take into account is the question of how the producer gains access to the final market. Therefore it is necessary to identify the key buyers of a determined chain and the dynamics of the buying function, in order to identify the critical success factors of the market (Kaplinsky & Morris, 2001).<br />Benchmarking production efficiency is another aspect tied to the methodology of VCA, where the efficiency of the different parties of the value chain is measured. The governance of the value chain is a critical aspect, where the rules that govern the value chain are identified. Another important feature is upgrading. Upgrading will be discussed in more detailed in a subsequent section. At this point it is important to highlight that upgrading practices and performance need to be analysed and recorded for VCA (Kaplinsky & Morris, 2001).<br />Finally, distributional issues have to be analyzed, not only competitive issues. Considering distribution, it has power and income components. In this context the different types of rents and barriers to rent have to be analyzed, the unit of account of the variables in question has to be determined, as well as the circumstances under which the value added and the turnover data are illustrative for the analysis. As well it has to be asked whether profits are the adequate measure for distribution and how the distribution of skills can be incorporated into the analysis. The vocational (local, national and global) dimensions, the decomposition of the income streams and the presence of SMEs have as well to be taken into account (idem).<br />Governance<br />As explained by Gereffi (1994), governance in value chains refers to the existence of key actors inside the chain which are responsible for the division of labour between the firms, and for the capacities of individual participants to upgrade their operations or functions.<br />According to Dolan & Humphrey (2000), there are two factors which explain why a commodity chain should be governed. First, the increased employment of product differentiation strategies in the markets of developed countries indicates that retailers obtain competitive advantage when they sell non-standardised products that are not commonly available in the market. Therefore the competition is not only based on price but on reliability, product assortment, product quality and innovative speed, among others. This competitive strategy leads to an increased need for supply chain governance (Dolan and Humphrey, 2000).<br />The second factor states that when developing country producers have difficulties in meeting the requirements of developed country markets an increase in value chain governance necessary (idem). These difficulties arise because the products made in developing countries differ from the equivalent products in developed markets. Therefore the producers need to acquire information of the developed markets in order to adapt their products (Keesing & Lall, 1992).<br />Gereffi, Humphrey &Sturgeon (2005) developed a theory of value chain governance, based on three factors: “(a) The complexity of information and knowledge transfer required to sustain a particular transaction; (b) the extent to which this information can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction; and (c) the capabilities of actual and potential suppliers in relation to the requirements of the transaction” (Gereffi et al., 2005: 85).<br />But, governance is different depending on the type of value chain. In producer-driven chains, the chain governance is exercised by the companies that control the key technology and production facilities. On the contrary, in buyer-driven chains, the key governance functions are exercised by the retailers and the brand name companies (Gereffi, 2004).<br />Barriers to entry and rent<br />Initially, rent, in its economic sense, was described as the payment made by a farmer to the owner of the land as contribution for being allowed to use the land (Ricardo, 1817), focusing on the natural scarcity of land instead of its differential fertility. But, as Kaplinsky (2000) explained, in the case of Value Chain Analysis, it has to be considered that economic rent arises of differential productivity factors and barriers to entry (which can be interpreted as scarcity). As well it has to be considered that economic rent does not derive only from natural scarcity but from purposive action by the producers. Besides economic rent is of dynamic nature, because the process of competition forces the producers’ innovations (Kaplinsky, 2000).<br />Barham, Bunker & O’Hearn (1994), identify two types of rent: resource and strategic rent. Resource rent refers to rent paid to the owners of scarce resources. On the other side, strategic rent is only paid when the resource holder or any other economic agent can push the price over the competitive price.<br />The increasing capabilities of countries in industrial terms have caused the reduction of entry barriers and therefore increased competitive pressures on value chains (Kaplinsky, 2000). <br />Upgrading in value chains<br />According to Fitter & Kaplinsky (2001), globalisation has forced producers to upgrade their production, as well for manufactured as for primary products, through differentiation of their products. Gereffi (1999) defines upgrading in value chains as the process by which industries in developing countries obtain new skills through export manufacturing and create links with new commodity chains which can use these skills (Gereffi, 1999). <br />Upgrading can also be seen as innovating in order to receive increased added value (Gereffi, 1999). But upgrading is not identical with innovating. In order to upgrade, the speed of innovating in comparison to the competition has to be taken into account (Kaplinsky & Morris, 2001).<br />Upgrading can occur on process, product, functional or intersectoral level (Giuliani & Bell, 2005). Product upgrading refers to moving into more refined product lines with increased value-added. Process upgrading involves transforming inputs into outputs with increased efficiency by reorganising the production process or using superior technology (Gwynne, 2008). Considering functional upgrading, the firm moves along the value chain in order to realize a function different from the previous realized. Finally, intersectoral or chain upgrading refers to the movement of the firm from one sector into another so that it participates in several value chains (Giuliani & Bell, 2005).<br />For primary commodities, according to Gibbon (2001), non volume-related upgrading (quality upgrading) can either be realized by capturing higher margins for unprocessed commodities by improving the quality of the product, or by producing new forms of existing commodities. Nevertheless, in practice, upgrading in global commodity chains show practical difficulties and complexities (Gibbon, 2001).<br />Overview of Coffee Market in the World<br />World Coffee Production<br />Coffee is the second most traded commodity in the world after oil. The first coffee plantations were originally found in Ethiopia and the Arabian Peninsula. Coffee was introduced to Asia and later to Latin America through the Dutch, who became the main suppliers of coffee to Europe since the 18th century where today it is widely grown throughout the tropical regions (UNCTAD-WTO, 2008). Most of the world’s green coffee beans are produced in Latin America and in particular in Brazil, which has dominated the world production since 1840. Even though there are about 55 country producers of coffee in the world, in 2006 more than half of global production was concentrated in three players: Brazil, Vietnam, Colombia (Roldán-Pérez, 2007). <br />Green coffee beans, in spite of being an essential commodity for many economies since the 19th century; producers, consumers and retailers have been concentrated in few players over the last 30 years. The world production of coffee is quite volatile and is extremely vulnerable to weather conditions. Although in 1976/1977 coffee production decreased due to the Brazilian drought, world production has grown steadily since 1980 going from 80.7 million bags in 1980/1981 to 123.4 million bags in 2007/2008 (UNCTAD-WTO, 2008; ICO, 2008).<br />Brazil is the world’s largest coffee producer and exporter. Vietnam expanded its production rapidly throughout the 1990s, nowadays holding the number two position; it has brought Colombia into third place and Indonesia into fourth. In 1976, 8 countries shared 60% of world coffee production (Brazil, Colombia, Cote d’Ivoire, Ethiopia, Indonesia, Mexico, Uganda and El Salvador); but with the rise of Vietnam as the second biggest coffee producer in 1999, just 4 countries (Colombia, Brazil, Vietnam and Indonesia) in the last decade, produced 60% of total production of coffee in the world (Roldán-Pérez, 2007). <br />Coffee is produced in more than 70 developing countries. 45 countries are responsible for over 97% of world output. By geography, the following figure show that coffee growing areas are between the tropics, including Asia, Africa and America with their share in total production of 25.5%, 12.6% and 61.9% respectively. <br />Figure SEQ Figure ARABIC 2: World coffee production by region<br />r: Robusta; a: Arabica; m: both Robusta and Arabica<br />Source: http://www.coffeebeans.ie/about-coffee-page34052.html<br />Production by type of coffee<br />Coffee is a seasonal crop and has been treated as a homogeneous commodity. Although, seasons vary from country to country, starting and finishing at different times throughout the year and so do the types of green coffee beans. Actually, there are many types of coffee produced within the same country but almost all commercial coffees come from two types of coffee: Arabica and Robusta. Arabica is grown at altitudes over 1,000 meters; it is characterized by its good aroma, taste, better quality and higher price and generally represents 65% of world coffee production. Robusta beans can grow at lower altitudes, are more resistant to diseases, characterized by beans of inferior taste to Arabica, usually with a woody and bitter flavor and more caffeine, Robusta beans account for 35% of world coffee production (Roldán-Pérez, 2007). In 2007/2008 world’s total coffee production was 123.4 million bags, 78 millions were Arabica and 45.4 were Robusta (UNCTAD-WTO, 2008) (see Table 1, below).<br />Table SEQ Table ARABIC 1: Overview of coffee world production by type 2002/03 - 2007/08 (in million bags)<br />Coffee Year 2002/03 2003/04 2004/05 2005/062006/072007/08World114.1112.5115.0117.0118.4123.4Arabicas 73,269.772.374.273.778.0Brazil29.025.927.828.428.430.3Colombia11.911.212.012.312.212.4Other America21.121.520.222.421.623.4Africa6.96.87.97.37.78.5Asia & the Pacific4.34.24.43.83.83.4Robustas 40.942.842.642.844.745.4Brazil9.68.18.39.39.010.7Other Latin America0.30.40.50.50.50.4Vietnam11.615.214.213.515.518.0Indonesia5.96.27.46.96.85.7Other Asia and Pacific5.45.55.45.75.94.3Cote d’Ivoire3.22.72.32.42.51.5Uganda 2.62.22.11.71.82.2Other Africa2.42.62.42.72.72.6Shares (percentage)Arabicas64.262.062.963.462.263.2Robustas35.838.037.136.637.836.8<br />Source: UNCTAD-WTO/ICO, 2008<br />Coffee Producing Countries<br />The International Coffee Organisation (ICO) has divided coffee production into four groups based on the type of coffee the most produced by each member country. However, many countries can produce both Arabica and Robusta (Table 2).<br />Table SEQ Table ARABIC 2: Coffee producing countries<br />Quality GroupProducersColombian mild ArabicasColombia*, Kenya, United Republic of TanzaniaOther mild ArabicasBolivia, Burundi, Cameroon, Congo Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, United States, Guatemala, Haiti, Honduras, India, Indonesia, Jamaica, Madagascar Malawi, Mexico*, Nicaragua, Nigeria, Panama, Papua New Guinea, Peru, (Puerto Rico), Rwanda, Venezuela, Zambia, ZimbabweBrazilian and other natural ArabicasBrazil*, Ethiopia, ParaguayRobustasAngola, Benin, Brazil, Cameroon, Central African Republic, Côte d’Ivoire, Democratic Republic of the Congo, Ecuador, El Salvador, Equatorial Guinea, Gabon, Ghana, Guinea, India, Indonesia, Laos, Liberia, Malaysia, Madagascar, Nigeria, Philippines, Sierra Leone, Sri Lanka, Thailand, Togo, Trinidad and Tobago, Uganda, Vietnam*.<br />Source: UNCTAD-WTO, 2009.<br />Note: The (*) points out the main producer country in each coffee category.<br />Brazil maintains its position of dominance, being the world's largest producer of natural Arabica coffee and the second largest producer of Robusta coffee after Vietnam.<br />Stocks in Producing Countries<br />Stocks are especially important in the coffee industry because they help to increase profits when coffee prices are higher and also protect the local producer when unexpected changes in the weather affect the crops. Before 1989 stocks had higher relevance since it helped countries to achieve their ICO quota (Roldán-Pérez, 2007). The table below shows stocks by type of coffee in the coffee years from 2003/04 to 2007/08 in producing countries, showing a steady decrease on stocks in the last five years. One reason to explain the decline of stocks is the increase of Robusta beans consumption worldwide. The stock of Arabica is proportionally greater than Robusta because the Arabia’s world production is higher.<br />Table SEQ Table ARABIC 3: Opening stocks in producing countries by type, crop years 2003/04 - 2007/08 (in 000s of bags)<br /> 2003/042004/052005/062006/072007/08World 52,91741,35937,68628,68825,401Arabicas 44,57334,60731,68524,18522,548Brazil38,06328,85026,03118,81618,502Colombia1,7751,4181,0461,2321,019Other Latin America2,2702,3782,4162,5261372 Africa2,0951,5761,6691,2051146Asia & the Pacific370385523406509Robustas 8,3446,7526,0014,5032,853Brazil4,2293,2062,8922,424893Other Latin America1752232Vietnam667900580500833Indonesia79754025513427Other Asia and Pacific1,1901,0451,245786848Cote d’Ivoire921689742282124Uganda 31417315221116Other Africa209194113163110Shares (per cent)Arabicas83.983.784.184.388.8Robustas16.116.315.915.711.2<br />Source: ICO, 2008<br />World Coffee Exports<br />In 1996/1997 total coffee exports in terms of green coffee beans were 82.4 million bags, while in 2006/2007 94 million bags were exported (ICO, 2008). In the last 12 years from 1996/1997 to 2007/2008, coffee exports value has not augmented considerably, only 4.84%. On the other hand, coffee exports value have fluctuated in the same period by 14.08%, from 12.4 USD billion in 1996/1997 to 13 USD billion in 2007/2008 (see Table 4). <br />The increase in exports is especially given to the rise in exports of Brazilian natural Arabicas and the Vietnamese Robustas. During 1998/1999 world coffee exports decreased in value due to the drought occurred in Brazil causing a loss of 13 million bags (Roldán-Pérez, 2007). In 2005/2006 world coffee exports were 10.1 USD billion reaching a substantial improvement compared to the previous years (see also Table 4). <br />Table SEQ Table ARABIC 4: World coffee exports, by value and volume<br />World coffee exports, by value and volume1997/98 - 2007/08Coffee yearUSD billionMillion bags1996/9712.482.41997/9812.179.11998/999.784.31999/008.789.42000/015.890.42001/024.986.72002/035.588.22003/046.488.82004/058.989.02005/0610.187.92006/0712.497.62007/08 (estd)13.094.0% change 1996/1997-2006/20074.84%14.08%<br />Source: ICO, 2008<br />Detailed exports by type of coffee by selected countries and regions are shown in the table below (Table 5). Arabica and Robusta green coffee beans exports accounted for 92.5% of total coffee exports in 2006/2007. <br />Brazil is the largest coffee exporter. Brazil exports account for 26.25% both in natural Arabica and Robusta of the total coffee exports in the world. Brazil exports are mainly natural Arabica because Brazil uses most of its Robusta production for the domestic instant coffee industry (Roldán-Pérez, 2007). Vietnam follows the leadership with 18.51% share of global coffee exports gaining the position of the most important Robusta exporters in the world. Vietnamese exports grew impressively from 11.52 million bags in 2002/2003 to 18.06 million bags in 2006/2007 (ICO, 2009) (See also Table 5). Colombia is the third largest exporter accounting for 10.85% of the total coffee exports in 2006/2007; Colombian exports have remained stable in terms of quantity over the last 5 years. These three countries represent 55.61% of total world coffee exports. Indonesia is the fourth largest coffee exporter but its relevance has decreased in the last decade, in Robusta exports only accounts for 3% of total coffee exports (see Table 5).<br />In 2006/07, exports of roasted coffee from producing countries accounted for 182,927 bags in GBE (green bean equivalent), representing relatively insignificant proportion of the overall trade in coffee, about 0.20% of the total coffee exports (UNCTAD-WTO, 2008). Exports of instant coffee accounted for almost 7.3% of world coffee exports. They have been growing in recent years from 5,67 million bags in GBE in 2002/2003 to 7,12 million bags in 2006/2007 (see Table 5). <br />Brazil is the main instant coffee exporter. Colombia is another important player among the Latin American countries. Lately, Vietnam has started to export local instant coffee but it is in a preliminary stage. Indonesia also produces instant coffee but in smaller proportions than other countries. However, instant coffee exports from developing countries have been growing by 25.52% from coffee year 2002/2003 to 2006/2007 (see Table 5), but their market share in the world is still small due to high competition with established big companies in developed countries and high import tariffs from the importer countries (Roldán-Pérez, 2007).<br />Table SEQ Table ARABIC 5: Overview of world exports by type: Coffee years 2002/03-2006/07 (in 000s of bags)<br />Coffee Years 2002/03 2003/04 2004/052005/062006/07Change % 2002/2003-2006/2007% of total exports 2006/2007World88,2488,7189,7587,8797,5910.60%Arabicas 54,8354,3955,9055,3959,648.77%61.11%Brazil21,1021,2322,9521,3324,0413.95%24.64%Colombia9,91 9,54210,3410,1010,596.86%10.85%Other Latin America15,9415,3714,4415,7016,906.07%17.32% Africa5,31 5,232 5,4535,165,544.37%5.68%Asia & the Pacific2,57 3,010 2,7133,102,56-0.58%2.62%Robustas 27,5328,2627,7626,3930,6611.37%31.41%Brazil3,67 949 1,0261,011,57-57.16%1.61%Other Latin America0,13 0,109 0,2720,290,2478.03%0.24%Vietnam11,5214,4613,9513,0818,0756.77%18,51%Indonesia3,904,36 5,4314,512,93-24.67%3.01%Other Asia and Pacific2,01 2,298 1,9452,752,2411.64%2.30%Cote d’Ivoire2,202,361,711,691,81-17.79%1.85%Uganda 2,35 1,968 1,9841,412,11-10.04%2.17%Other Africa1,75 1,762 1,4401,661,69-3.71%1.73%Roasted Coffee 0,21 0,110,110,250,18-14.49%0.19%Instant5,675,955,985,837,1225.52%7.29%Brazil2,803,21 3,2933,063,2816.88%3.36%Other Latin America1,501,461,741,781,9329.03%1.98%Africa0,420,25 0,2510,400,89111.93%0.91%Asia0,951,03 0,6950,591,037.67%1.05%Arabicas62,1461,3162,7863,0461,10-1.67%62.61%Robustas31,2031,86 30,5730,0431,410.67%32.18%Roasted0,240,13 0,120,290,20-16.67%0..0%Instant6,426,706,536,637,2913.55%7.47%<br />Source: UNCTAD-WTO, 2008.<br />Table 6 below shows the world’s coffee exports in volume and value by the four groups classified by the ICO. In 2007/2008 Robusta’s exports were 33.11 million bags and 4.43USD billion, Brazilian natural Arabicas’ exports were 27.47 million bags and 4.47 USD billion, other milds Arabicas were 22.6 million bags and 3.89 USD billion and finally Colombian mild Arabicas were 12.71 million bags and 2.43 USD billion. The above means, the largest group in volume is Robusta and the largest group in value is the Brazilian natural Arabica (Table 6).<br />Table SEQ Table ARABIC 6: Volume and value of export by group of coffee (volume in million bags, value in million USD)<br />Crop year2004/052005/062006/072007/08 *Colombian Milds - Volume 12.19 11.88 12.51 12.71 - Value 1.72 1.80 2.02 2.43 Other Milds - Volume 19.32 20.49 21.37 22.06 - Value 2.53 2.87 3.20 3.89 Brazilian Naturals - Volume 27.95 26.68 29.73 27.47 - Value 3.04 3.29 4.02 4.47 Robusta - Volume 30.62 29.20 34.59 33.11 - Value 1.72 2.12 3.24 4.43 Total - Volume 90.09 88.25 98.21 95.34 -Value 9.01 10.08 12.48 15.22 <br />Source: ICO, 2009b<br />World Coffee Consumption<br />According to the UNCTAD and the WTO (2008), global consumption in coffee year 2006/07 totaled 125.9 million bags. During 2006/2007, coffee consumption in the world experienced a steady growth of 2.26% compared to 2005/2006 (89.85 million bags) (ICO, 2008) (see Table 7). In 2006/2007, importing countries consumption accounted for 73% of global consumption (91.8 million bags) with an average growth since 2002/2003 of 8.72 (see Table 7). On the other hand, coffee consumption in producing countries for the same year accounted for 27% of global demand (34.02 million bags). In 2008, World coffee consumption is estimated to reach 128 million bags, 79 million bags of Arabica and 49 million bags of Robusta (ICO, 2009). <br />United States is the world’s biggest consumer of coffee, accounting for 23.08% of the total consumption in 2006/2007 in importing countries with 21.21 million bags. Regarding the other importing countries, Germany is the second coffee consumer with 9.08 million bags, accounting for 9.88% of the consumption in importing countries. Japan, Italy and France are the third, fourth and fifth coffee consumers among importing countries. Probably, the most impressive growth has been experienced in Japan, where consumption has grown by 8.16% from 2002/2003 to 2006/2007 (see also Table 7). <br />Table SEQ Table ARABIC 7: Consumption in importing countries/areas 2002/03 - 2006/07 (in 000's of bags)<br />Consuming Countries/areas 2002/03 2003/04 2004/052005/062006/07% change 2002/2003-2006/2007% total consumption 2006/2007World84,5186,8587,6089,8591,888,72%North America 22,2023,4823,4324,4324,7411,45%26,93%United States20,0520,7320,6321,3321,215,75%23,08%Western Europe (including the enlarged EU) 41,4141,3041,4342,2142,863,50%46,65%France5,435,04 4,7735,115,542,01%6,03%Germany9,459,14 9,1838,929,08-3,87%9,88%Italy5,405,53 5,6265,485,827,70%6,33%Eastern Europe (excluding EU countries) 5,915,86 5,9936,016,154,04%6,69%Asia and the Pacific 10,7711,6712,1312,7012,7718,55%13,89%Japan6,72 7,152 7,0237,277,278,16%7,91%Others 4,22 4,554 4,6254,515,3627,01%5,83%<br />Source: UNCTAD-WTO, 2008<br />Domestic consumption in producing countries was estimated by the International Coffee Organisation of 34.23 million bags in 2007/2008 (see Table 8). From the overall consumption in producing countries, Brazil is by far the largest consumer, Brazil’s consumption is 17,1 million bags, accounting for almost 50% of the total consumption in coffee producing countries. Brazil is the second largest coffee consumer in the world. Two major reasons explain the increase in domestic consumption in Brazil: first, an increase in disposable income in Brazil in the recent years; second, Brazil has implemented a policy of using better quality coffee for its internal consumption. Countries like Colombia and Vietnam are trying to do the same, in order to boost their domestic consumption (Roldán-Pérez, 2007:36). Among producing countries in 2007/2008, Mexico is the second largest coffee consumer after Brazil with 2.2 million bags, it is followed by Indonesia, Ethiopia, India and Colombia. Although Vietnam is the second producer of coffee in the world, its domestic consumption is still very small, only 1million bag in 2007/2008 (see Table 8). <br />Table SEQ Table ARABIC 8: Domestic consumption in coffee producing countries. Crop year 2007/08 (estimated). Figures are rounded up to nearest '000<br />Million bagsAfrica3,282Cote d'Ivoire317Ethiopia1,833Asia & the Pacific6,679India1,430Indonesia2,000Philippines1,060Vietnam1,000Latin America24,271Brazil17,100Colombia1,400Mexico2,200Venezuela760Total34.232<br />Source: UNCTAD-WTO, 2008 based on ICO data.<br />Table 9 illustrates the per-capita consumption in main importing countries from 2001 to 2005. European countries are the ones with the highest per-capita coffee consumption in the world where the Scandinavian countries are the main consumers. Finland is the world’s largest per-capita consumer of coffee, consuming 12 kg of coffee per person. Finland is followed by Norway, Denmark and Switzerland with 9.7 and 9 kg of coffee per person respectively. The main European importing countries like Germany, France and Italy and United States have lower consumption per person compared with the Scandinavian countries (see Table 9). <br />Table SEQ Table ARABIC 9: Per-capita coffee consumption in main importing countries (kg/person)<br />CountryYear20012002200320042005Finland11,011,211,411,912,0Norway9,59,19,09,39,7Denmark9,79,08,29,49,0Sweden8,58,38,08,37,8Switzerland9,86,87,05,89,0Germany6,96,66,67,45,9France5,35,55,55,05,1Canada4,64,74,7--United States4,14,04,34,34,2Spain4,34,34,24,04,2Japan3,33,33,23,33,4Poland3,03,13,13,23,1United Kingdom2,22,32,22,42,4<br />Source: Ministry of Agriculture and Rural Development, 2006<br />Per-capita consumption in producing countries is still low compared to importing countries. The largest per-capita consumer among these countries is Costa Rica with less than half of Finland’s consumption, 5.4 kg of coffee per person; followed by Brazil 5.3, Dominican Republic 2.5, Colombia 1.9 kg of coffee per person (see Table 10). <br />Table SEQ Table ARABIC 10: Per-capita coffee consumption in main producing countries<br />CountryYear20012002200320042005Brazil4,64,64,75,15,3Costa Rica3,93,73,25,25,4Dominican Republic2,32,42,42,62,5Colombia2,01,91,91,91,9Honduras2,01,81,82,01,9Mexico0,80,90,90,90,8<br />Source: Ministry of Agriculture and Rural Development, 2006<br />Traders and Retailers:<br />Coffee demand is also high concentrated in few destinations. According to the International Coffee Organisation, only 26 countries import significant quantities of coffee, in amounts that go from 180 thousand bags and above. High concentration also happens in other steps of the value chain of coffee, in the transformation and process of the bean. Studies have found that few roasters and retailers control a big proportion of their segments (Reina et al., 2007:47). In 2001, only five traders controlled 48% of the business activity. In a similar way by 2006, only five roasters controlled 47% of the business activity. Nestlé roasted 12.5 million bags, Kraft 12 millions, Sara Lee 8 millions, Folger 4.8 million and Tchibo 4 million bags (see Table 11).<br />Table SEQ Table ARABIC 11: Concentration of multinational corporations in the international coffee industry (2006)<br />Coffee processing companiesMillion bagsNestlé12.5Kraft12Sara Lee8Folger4.8Tchibo4Subtotal (47% of world market)41.3<br />Source: NCF, 2006 based on Volcafé’s data <br />Nowadays, retailers have gained high negotiation power with their suppliers due to the globalization which has cause their concentration, deeper knowledge of their needs and likes of the different consumers and development of their own brands. For instance, in the roasted coffee market, distributed by supercenters in the United States, Kraft Foods and Procter & Gamble had more than 75% of the sales market in 2002 (Reina et al., 2007). In the same year, companies such as Kraft Jacobs Suchard and Tchibo/Eduscho managed 56% of the market in Germany while Ueshima Coffee and Key Coffee had 43% of the Japanese market (Reina et al., 2007:48)<br />International Coffee Organisation (ICO) and coffee prices<br />Coffee is an important commodity for many economies; it has experienced periods of oversupply and low prices and other periods of short supply and high prices where the former have been longer than the latter. After ups and downs in the prices between 1950’s and the 1960’s, an intergovernmental initiative came into effect in order to stop the fall in prices and avoid negative political and economic consequences for the producers in developing countries (Roldán-Pérez, 2007). With this idea in 1963, The International Coffee Organisation (ICO) initiated in London with the support of the United Nations due to the high economic significance coffee had for developing countries.<br />In its beginnings, the main functions of the ICO were the establishment of coffee exports quota and setting up the level of coffee market prices. By July 1989, the system went down under the pressure of competing demands from exporters for market share and the consequences were the suspension of the coffee export quota and the start of negotiations of the new International Coffee Agreement (Roldán-Pérez, 2007).<br />The ICO is the main intergovernmental organisation for coffee that aims to deal with the challenges that faces the coffee industry through international cooperation. It makes a contribution to the coffee economy and the improvement of the standards of livings of the producing countries dependent on this product (idem).<br />ICO Indicator Prices<br />The ICO established the indicator price system to provide a trustworthy and consistent procedure for keeping record of prices for different types of coffee, as well as a composite price which would reflect the weighted average of daily movements in the price of coffee (UNCTAD-WTO, 2008). The composite indicator price is obtained by taking a weighted average of the indicator prices for each separate group, weighted meaning to the relative share of each one in the international trade. The weight by group is: Colombian milds, 14%; other milds, 20%; Brazilian naturals, 31% and Robustas, 35%; the weight composition is reviewed every two year (UNCTAD-WTO, 2008).<br />The ICO indicator price system is based on the four separate price groups. According to the price group, prices are determined by New York and Germany markets and in the case of Robusta price group, by New York and France markets; and a daily weighted average is also calculated for each group (see Table 12, below).<br />Table SEQ Table ARABIC 12: ICO Indicators Price. Annual average 2001-2008 (US cents per pound)<br /> Colombian Mild ArabicasOther Mild ArabicasBrazilian Natural ArabicasRobustasAnnual/ICOMarket Daily DailyMarket DailyMarket DailymonthlyCompositeNew weightedNew weightedNew weightedNew WeightedaveragesPriceYorkGermanyaverageYorkGermanyaverageYorkGermanyaverageYorkFranceAverage200145,5972,2268,2472,0561,9463,1462,2850,5252,4250,7027,3027,4927,54200247,7465,2664,7864,9060,4362,3161,5245,0945,9245,2330,8329,7630,01200351,9067,3164,3465,3364,0864,3064,2050,8250,1650,3138,3936,5036,95200462,1584,1579,4981,4480,1580,6480,4768,1869,1168,9737,2835,6535,99200589,36117,02114,67115,73114,30115,22114,86101,36102,49102,2953,3749,8750,55200695,75118,36115,70116,80113,95114,80114,40102,89104,19103,9270,2866,9867,552007107,68126,74124,70125,57123,20123,81123,55110,72112,06111,7988,2986,2986,602008124,25145,85143,12144,32138,32140,86139,78122,51127,86126,59106,31105,03105,282009 January108,39148,88137,62142,32128,03128,93128,30101,43111,65109,1885,7782,1182,74February107,60149,58140,74144,55128,63130,13129,48100,45109,87107,6981,6679,9080,22<br />Source: ICO, 2009<br />World coffee prices fluctuate day by day and they are determined by supply and demand (Roldán-Pérez, 2007). Since the Brazilian drought burst in 1976, the ICO kept the prices high until its collapse in 1989, when international prices started to fall significantly. During the middle of 1990’s, prices were at a high level due to a loss of Brazilian production of 13 million of bags of coffee (idem). Then in 1999, world production augmented mainly caused by the improvement in Brazilian policies to boost domestic consumption and the flourish of Vietnam as a Robusta producer. The lowest level in 30 years of coffee prices was reached between 2000 and 2001, when global oversupply caused coffee prices to drop under cost causing serious damage in domestic economies (idem). Since 2005, world coffee prices have been recovering from 1999 level, reaching a price of 107.6 US cent per pound in February 2009 (see table 12 above), showing some improvement in profits for traders, roasters and finally for producers.<br />Mapping global value chain of coffee<br />The coffee industry has, following recent trends of the primary products market, become more differentiated (Fitter & Kaplinsky, 2001). For example, the Fair-trade share of the coffee industry has been growing: in 2007 the imports of Fair-trade coffee increased 19%, whereas coffee imports increased only 2% (FLO, 2008; ICO figures). <br />As well as the coffee industry has liberalized its trade, it has developed several self-regulatory systems. These governance systems mainly improve the reputation of its members, which are mainly the coffee-growing farmers, and facilitating as well the relationship between the roasters or traders and the coffee growers. Especially national coffee institutes in coffee producing countries could have impact on improved coordination along the links of the coffee value chain (Muradian & Pelupessy, 2005).<br />According to Kaplinsky (2006), the Coffee Value Chain can be upgraded through product development and positional consumption. The producers have focused mainly on productivity improvement, whereas the roasters and retailers have emphasized on product innovation (Idem). Considering functional upgrading, growers have been blocked to move upwards the value chain to the processing stages by tariff escalation policies (Talbot, 1997) and considering other value chains, many producers have been forced out of coffee production because the variable costs are not being covered (Idem).<br />As well, Talbot (1997) suggests that in case of coffee value chains it has been remarkable that an important part of the surplus of the value chains comes to the core, unlike other primary commodities, largely due to International Coffee Agreements.<br />As drawn by Fitter & Kaplinsky (2001), a general value chain for the coffee industry can be described as follows: <br />First, farmers pick and dry or wet process the coffee cherries. For the coffee beans they receive a farm-gate price.<br />Continuously, the coffee cherries are processed. Both for de dry and wet processed coffee cherries, the factory-gate price is paid. <br />The beans are passed to an intermediary for exportation, at the FOB price.<br />The beans are sent to the importing countries, where they arrive at CIF prices.<br />The beans are then sold at wholesale prices.<br />The beans are then roasted and sold at factory gate prices.<br />Finally the beans are sold at retail prices by retailers to the public for domestic consumption, or for out-of-home consumption by restaurants, caterers and coffee bars (Fitter & Kaplinsky, 2001).<br />The following graphic based on Keane (2008) research, illustrates the value added at each stage of coffee chain. <br />Figure SEQ Figure ARABIC 3: Value added created at stage of the coffee GVC.<br />Data source: Kaene (2008).<br />The following graphic represents the global value chain of coffee.<br />Figure SEQ Figure ARABIC 4: Global value chain of coffee<br />Source: Authors<br />Analysis on Colombia’s and Vietnam’s Participation in Coffee Value Chain<br />Vietnam’s participation on coffee’s GVC<br />Background<br />Coffee was introduced to Vietnam in 1857. It was first planted in the precincts of churches in Ha Nam, Quang Binh and Kon Tum provinces. At the beginning of the 20th century, coffee bushes were planted on quite a large scale by French plantation owners at Phu Quy – Nghe An and later at Dak Lak and Lam Dong.<br /> In the 1960s and 1970s coffee was planted in some state-run plantations in the northern provinces of Vietnam, but did not become established because of insect damage to the Arabica variety and unsuitable natural conditions for the Robusta. In 1975, when the nation was united, Vietnam had more than 13,000 hectares planted with coffee, producing 6,000 tons in total (Long, 2007).<br />Thanks to funding from agreements between the Vietnamese government and countries such as the former Soviet Union, the German Democratic Republic, Hungary, Slovenia and Poland, coffee has been heavily developed in the Central Highlands since 1975. 500,000 hectares have now been planted with an output about 1 million tons (Nhan, 2008).<br />Natural conditions<br />The coffee growing area in Vietnam increased rapidly from 19,800 hectares in 1982 to 529,000 hectares in 1999 (Nhan, 2008). However, since 1999, the area has fluctuated around 500,000 hectares (See figure 5 below).<br />Figure SEQ Figure ARABIC 5: Coffee growing area in Vietnam<br />Source: VICOFA in Nhan, 2008<br />According to Long (2007), Vietnamese coffee includes Robusta (accounts for around 90%), Arabica (accounts for around 10%) and Exelsa (accounts for less than 1%).<br />Robusta is popular in southern provinces such as Lam Dong, Gia Lai, Dong Nai, Kon Tum, Dak Lak provinces. Robusta usually grows in tropical areas and is best suited to altitudes under 1,000m, temperatures from 24 to 29C, rainfall above 1000mm, and it requires much sunlight. Robusta has high caffeine content (2-4%), so the flavor is not as pure as Arabica. Robusta, however, grows strongly and has disease resistance. These characteristics are in harmony with the natural conditions in the southern provinces of Vietnam. Robusta grown there produces record yields and a more delicious flavor, and is the favorite of many countries in the world. However, the quality of the Robusta produced is uneven because of processing technology, drying equipment, and post-harvest technology problems. These cause the coffee beans to have a high humidity level, and not meet the required standard of color, quality and so on. This is the reason why Vietnam’s coffee price is lower than the world price. <br />Arabica is mainly planted in the mountain area in the north of Vietnam. Vietnam has about 20,000 hectares of it, mainly in Tuyen Quang, Bac Giang, Thai Nguyen, Vinh Phuc, Lai Chau, Hoa Binh, Lang Son, Yen Bai and some areas in Quang Tri and Lam Dong, but on a small scale. Arabica is usually planted at attitudes from 1,000 to 1,500 meters with temperatures from 16 to 25C and with rainfall above 1,000mm. Arabica does not need as much sunlight as Robusta. This kind of coffee, however, has low caffeine content, only 1-2% and it is sensitive to some diseases such as rust, dry branch, dry fruit and pink disease. These characteristics make Arabica suitable for growing in provinces in the centre and north of Vietnam. Arabica coffee is more difficult to develop in Vietnam than Robusta because of unsuitable altitudes. Some areas specializing in coffee cultivation in Vietnam such as Buon Ma Thuot Dak Lak, Bao Loc Lam Dong are from 500 to 1,000 meters in altitude. It is for this reason that though the price of Arabica is twice that of Robusta, it is not planted on a large scale in Vietnam.<br />All coffee in Vietnam is harvested between October and January; therefore consumption year is counted from October of the last year to the end of September of the next year.<br />Infrastructure<br />According to the GSO (2008), Vietnam’s coffee industry supports about 300,000 households with more than 600,000 workers, rising to 700,000 or 800,000 in the harvest season. This number accounts for 1.83% of the total labor force of Vietnam and 2.93% of total agricultural labor force. Plantations and state-owned companies own only 10-15% of the total 500,000 hectares of coffee; the rest belongs to farm owners. The farms are usually from 2 to 5 hectares in size.<br />In term of the processing capacity, Vietnam has nearly 100 processing plants, with capacities ranging from 5,000 to 60,000 tons of coffee beans, producing a total of about 1 million tons every year. Most equipment is domestically produced with some being imported (some wet process lines from Brazil, some color classification machines from Japan). The level of technology employed is generally not sufficient to produce a quality product, especially not for export. Low input quality is also a factor, only 20% meets requirements. <br />In term of production of ground roasted coffee and instant coffee, Vietnam has about 16 corporations and more than 10,000 small holdings which specialize in roasting and grinding coffee. One of them is the state owned company Vinacafe, the others are joint stock and private companies with 50 process lines producing instant coffee with a total output of 10,000 tons per year. <br />The implementation of quality management systems and advanced food safety hygiene systems meeting international standards such as ISO and HACCP is limited. In 2006, Vietnam issued a quality standard, TCVN 4193:2005 but it is not compulsory, only 10% of coffee exporters producing around 1-2% of exports use it.<br />Policy and legal frameworks<br />Vietnam is looking to promote coffee to non-traditional and domestic markets. Vicofa has reportedly signed a cooperative agreement for annual coffee exports of around 10,000 tons to China. Vietnam hopes that its huge neighbor will become a market for Vietnamese coffee.<br />Vietnam also sees importance in promoting coffee in the domestic market of more than 80 million people. Vietnam will work on promotion programmes to increase coffee consumption in the domestic market to a million bags, from the current level of a half-million bags in the near future. There were coffee festivals organized in Buon Ma Thuot city in 2007 and 2008, attracting business people and consumers to visit and find out about coffee culture. The Ministry of Agriculture and Rural Development (MARD) has approved a plan to increase the coffee sector’s competitive capacity through 2015 and has a vision for 2020 with investment reaching nearly VND 33,000 billion. The plan aims to ensure that all Vietnamese coffee products are produced in line with international quality standards and traded on an equal footing in the international market. The state budget funds a major part of the total VND 33,000 that will be used to implement transport projects in the Central Highlands provinces and coffee growing areas in the central and north-western regions. Investment will be poured into the building of reservoirs and canal systems to ensure that 75 percent and 100 percent of coffee growing areas will be irrigated by 2015 and by 2020, respectively. <br />In addition, ODA funding worth VND 13,075 billion will be spent on intensive farming for 200,000 hectares of coffee in some Central Highlands provinces including Dak Lak, Lam Dong, Gia Lai and Dak Nong and 6,000 hectares of tea and coffee in Lam Dong, Quang Tri, Thua Thien-Hue and Son La. Approximately VND18,585 billion from businesses and individuals will be used to purchase machines and processing equipment (Vietnam Trade Office in the USA, 2008).<br />Vietnam has also put coffee trading floors into operation in the Central Highlands and will open another in Ho Chi Minh City. These will apply modern transaction methods, such as deadline transactions, to prevent market fluctuation risks and put Vietnamese coffee on international trading floors.<br />To improve export coffee quality, the Government and coffee organisations are recommending that coffee exporters apply the new coffee standards that were introduced in early 2002 (see Report VM-3012). However, very few coffee exporters have used the new standards, as they do not receive a lot of encouragement to do so, or higher prices from importers. According to the Ministry of Trade (MOT), strict enforcement of the new standards will be necessary to improve coffee quality for export. International buyers seem to disagree and/or like buying poor quality coffee at cheap prices.<br />Vicofa also wants coffee buyers to participate in the coffee quality improvement programme. Vicofa thinks coffee importers should purchase coffee at the lower moisture rate of 12.5% instead of the current rate of 13%, and that the foreign matter percentage for export coffee should be reduced to 1% from the current level of 5%. Again, it seems that international buyers are reluctant to actually demand better quality coffee through higher prices. <br />In 2003, Vietnam and Indonesia (two leading Southeast Asian Robusta coffee powerhouses) signed a memorandum of understanding (MOU) to retain 20 percent of their production if export prices are too low. However, many in Vietnam see that idea as unfeasible (and expensive). According to Vicofa, the programme would cost Vietnam at least VND 1,400 billion (or 89 million USD) to keep 140 tons of Robusta off the market. Moreover, assuming Vietnam and Indonesia did retain large stocks, importers could easily buy coffee from other countries because Vietnamese and Indonesian Robusta coffee exports only amount to about 35% of the global Robusta coffee trade.<br />Vietnam’s position in global coffee market<br />Looking at Vietnam’s exporting situation over recent years, it is easy to note the rapid growth in export output and turnover. Coffee is currently the leading product in export turnover of the agriculture and forestry product group.<br />Table SEQ Table ARABIC 13: Exporting output and turnover of Vietnamese coffee<br />YearOutput(million ton)Changes compared to the previous year (%)Turnover(‘000USD)Changes compared to the previous year (%)% of total export19952120560010.28%199623310423-245.83%199739268491165.35%1998382-3594216.35%199948226585-25.07%200073452501-143.50%200193127391-222.60%2002722-22322-181.93%2003691-4428332.12%200497541641502.42%2005885-9735152.28%200689711,101502.76%20071,209351,878713.87%20081,132-22,116+12.53.36%<br />Source: Authors calculated from annual reports of Vietnam’s Ministry of Trade from 1996 to 2008<br />Export output <br />Export coffee output reached 931 million tons in 2001 but decreased rapidly to 722 million tons in the following year. Output in the following years increased and reached a peak in 2007. The average growth rate of coffee exports in the period 1995-2007 was 19.43%.<br />Export turnover <br />Vietnam coffee turnover has increased continuously. Vietnam exported 212 million tons of coffee in 1995 and this figure increased to 1,209 million tons with a turnover USD1.87 million (a record in both quantity and price). The average growth rate of export coffee turnover in 1995-2007 was 10.94%. Vietnam had 179 corporations exporting coffee in 2007, an increase of 26 corporations in comparison with 2006 (Nhan, 2008). <br />Export turnover increased more slowly than output growth because of the fluctuation of export prices. Especially in the period 2001 to 2005, export turnover did not increase much and even decreased although there was sudden growth in export output. In 2001, for example, export output reached 931 million tons (an increase of 26.8% in comparison with 2000) but export turnover fell to 391,000 USD, equivalent to 78% of 2000.<br />Figure SEQ Figure ARABIC 6: Vietnam exporting coffee situation (1993-2007)<br />Source : Drawing based on the data from annual reports of Vietnam’s Ministry of Trade <br />Although supply resources for exporting were limited in 2008, there was a good price so it was estimated that the export turnover of Vietnam coffee would increase by about 12% in comparison with 2007, with a total value more than 2 trillion USD. According to information from Vietnam’s Agriculture and Development Ministry, the output total in 2007-2008 is estimated to be 17.4 million bags, a fall of more than 17% in comparison with 2006-2007. Vietnam has become the second largest coffee exporting country in the world after Brazil<br />Export product structure<br />According to Nguyen Thu Huyen (2008), 95% of Vietnam’s coffee exports are green coffee beans, 1-2% is roasted ground coffee and only 3-4% is instant coffee. The reasons for this are weak processing capacity and a lack of brands.<br />Robusta accounts for nearly 95% of Vietnam’s total output and Vietnam’s output for 41.3% of Robusta produced in the world. The value of Arabica is between two and two and a half times that of Robusta, but it accounts for only 5% of exports.<br />The quantity of processed coffee, such as roasted coffee and instant coffee, which is exported is too small. Roasted coffee and instant coffee exports of Vietnam accounted for only 0.43% of turnover total in 2003, in spite of its high added value and profit level. Instant coffee’s added value is more 3.41 times that of coffee beans. The export value of roasted coffee is more 4.38 times that of coffee beans while its processing ratio is too low (Huyen, 2008). However, it is difficult to increase the quantity of processed coffee exported because Vietnam does not have a large market and is not strong enough to compete with famous coffee brands.<br />According to VICOFA, there are around 150 exporters in Vietnam, concentrated in Daklak and Ho Chi Minh cities. Exporters include subsidiaries of Vietnam Coffee Corporation (Vinacafe) and Intimex Import-Export Corporation (Intimex). The biggest exporter is Tay Nguyen Coffee investment and import-export company (Vinacafe Tay Nguyen), a subsidiary of Vinacafe in Dak Lak, with around 20% of the total coffee exports of Vietnam (, 2008). <br />Export prices<br />The fluctuations of the average export price of Vietnam’s coffee are shown in the following figure.<br />Figure SEQ Figure ARABIC 7: Export price of Vietnam coffee (1995-2007) (In USD)<br />Source: Nhan, 2008<br />The period from 1995 to 2001 was a period of depression for Vietnamese coffee with a reduction of 7.49% per year, from 2,393 USD per ton in 1995 to 400 USD per ton in 2001. Low prices were the reason why coffee output in 2001 was high but export turnover was low. <br />Luong Xuan Quy and Le Dinh Thang have explained the reduction of Vietnam export coffee prices with reference to the rapid increase in world output followed by the fall in world prices (NEU, 2006). At the beginning of the 1990s, Vietnam’s coffee output was not affected by the world price because Vietnam’s role in the world coffee market was slight. Since the middle of the 1990s, Vietnam has become a big coffee exporting country. The world price increased suddenly from 1994-1996, which resulted in huge profits for Vietnamese farmers and encouraged them to increase coffee production. In 2001 coffee output increased, exceeding the predictions of the international specialists and coffee trading companies. It led to an excess of supply over demand, which pushed the coffee price down. <br />The export price gradually rose to 1,548 USD per ton in 2001-2007, four times that of 2001. However, it was not as high as the price in the golden age of coffee (1995). The average export price in 2007 increased 25.12% in comparison with the previous year, 88.37% comparing to 2005, and 265% in comparison with 2001. In December 2007, the average export price of Vietnam coffee was 1,730 USD per ton, an increase 21.57% compared to 2006, and higher than the average export price in 2007 (1,553 USD per ton). <br />The main reason why Vietnam’s coffee export turnover in 2007 was the highest ever is that the world price in general and Vietnam’s export coffee price in particular increased sharply at that time. The average price of Robusta of Vietnam in 2007 was 1,605 USD per ton (compared to 1,260 USD per ton in 2006) and the world price was 1,718 USD per ton (compared to 1,335 USD per ton in 2006). <br />The export price of Vietnam coffee broke its previous record in March 2008. The buying price of Robusta beans in Tay Nguyen reached 42,000 VND per kg, the highest price in the last 14 years. The reason for this was that countries in the southern hemisphere had a poor coffee crop. Brazil’s production fell 23% and that of Indonesia by 19% while the demand in coffee producing country increased. In addition, many investment funds and roasting coffee manufacturers bought coffee for reserves because of a worrying lack of coffee material. Vietnam, therefore, had a chance to capture the world market. But Vietnam’s coffee price suddenly dipped to 190 USD per ton in the session of March 9th. After increasing continuously over many days, the coffee price suddenly dipped, which made many people fail to deal with the market signals. Because the price fell so rapidly, Vietnamese farmers rushed to sell coffee, which made the market fall further. According to the Coffee Association, this movement was rooted in a fall in the London market. In addition, corporations sold a huge amount of coffee when prices were high leading to a reduction in coffee prices. In general, export and domestic prices follow international market fluctuations. The gap between Vietnam export prices and international prices is narrowing, but slowly. In fact Vietnam’s export price is lower than that of other exporting countries by about 50-70 USD per ton. The principle reason is that Vietnam exports mainly Robusta with a lower export value than Arabica. Besides, coffee quality is not high and farmers often pluck all the coffee berries on branches when harvesting, so green berries are present. <br />Export markets<br />In term of market structure, Vietnam has exported to 74 countries and territories, among them the ten leading importing countries in the EU and America. They have been Vietnam’s main markets from 1999 to 2007 (Nhan, 2008).<br />Two big markets in Asia, Japan and Korea, are also important customers of Vietnam. The permanent markets in ASEAN are the Philippines and Malaysia, and recently Indonesia. Some countries such as Poland, Russia and China often buy coffee from Vietnam.<br />Vietnam also has some new customers in America such as Ecuador, Mexico, Chile, Paraguay and Nicaragua. It is noteworthy that Brazil - the leading coffee producing country in the world - intends to buy Vietnamese coffee to increase domestic consumption and establish a cooperative relationship with Vietnam.<br />Figure SEQ Figure ARABIC 8: Exports markets for Vietnamese coffee<br />Source: Nham, 2008<br />In 2007, European countries continue to be the biggest importers of Vietnam’s coffee, accounting for more than 40% of the total (mainly Germany, Spain, Italy, Poland and Belgium), following by the United States (above 9%) and Asia (above 7.5%).<br />In general, German and the United States have been Vietnam’s biggest customers lately. This is different from 1992 and 1993 when Vietnam’s export markets were mainly Singapore, Hong Kong, Japan. These countries accounts for 60% of the top ten importing countries. This proves that the reputation of Vietnam’s coffee is improving.<br />Figure SEQ Figure ARABIC 9: Vietnam's participation of coffee GVC<br />Source: Authors<br />There are no statistics on the Vietnam’s domestic coffee consumption. Interviews with experts indicate that it accounts for an estimated figure of 5% of total production. However, domestic consumption has significantly increased in recent years, reaching about 60,000 tons in 2005 compared with less than 40,000 tons three years ago. However, Vietnam’s domestic consumption per capita of around 0.5kg per year is much lower than the average for producing countries which is 3kg (Vu, 2008). Domestic consumption of coffee is concentrated in the major cities of Vietnam. According to a survey by the Institute of Agriculture and Rural Development Strategy and Policy March 2006, each year people in Hanoi consume 0.752kg while the figure in Ho Chi Minh city is 1.65 kg, much higher than average. There is also a difference in consumption customs. In Ho Chi Minh City, 47% drink coffee at coffee bars while in Vietnam as a whole the figure is only 36% (Huyen, 2008). This number reflects the potential of Vietnam’s domestic coffee market, especially in the Northern provinces (IPSARD, 2006). <br />Most of Vietnam’s coffee exports are coffee beans and roasted ground coffee. There are few exporters of instant coffee. This is the reason that Vietnam occupies a small proportion in the GVC. A 300g Nescafe box analyzed in the UK market was found to have only 2% of its contents from Vietnam (Anh, 2008).<br />Actors<br />The main players in Vietnam’s coffee value chain are described below.<br />Farmers<br />Farmers play the most important role in the value chain because they take part in the producing phrase, the first phrase in chain.<br />There are three kinds of coffee farms: farms given land property rights by the state farms which have received contracts from state-run farms and farms cultivating unused land and forest land by themselves. <br />Farms with land property rights are small in scale (around 2-5 hectares each) but they account for the lion’s share of coffee planting farms. Their main workforce is their family members; their capital is borrowed from banks and other resources. Coffee is the main income resource of households with good, flat land, stable water resources, and access to transportation systems. But in less advantaged areas agriculture production is more complicated and investment in coffee intensive cultivation is at a lower level. <br />Farms planting coffee according to contracts with state-run plantations and companies account for 10-15% of coffee planting households. These households have some rights and benefits but they also have some duties. They are supplied with fertilizer and irrigation. Some of them have a monthly salary but they use their own labor and sometimes they must invest more capital in fertilizer and other inputs besides those supplied to them (Huyen, 2008).<br />The last group consists of households cultivating unused and forest land. Most of these households are quite rich and they produce coffee on a large scale. They account more than a half of coffee plantations in Vietnam and use an average of 4.32 hectares for planting coffee. The high income households often sell dry coffee.<br />Methods of planting and taking care of coffee vary but have the same basic characteristics; using seeds and not paying attention to covering trees. In addition, they invest heavily in their farm and use fertilizer and irrigating to have high production in years with high prices. However, when prices fall farmers no longer want to invest in their farms, which makes them decline quickly and have a low economic impact. When harvesting, Vietnamese farmers often pluck all berries on branches, and do not distinguish between ripe berries and green ones.<br />Harvested coffee is processed in three ways. The first is green coffee; coffee berries harvested from bushes. The second is dry coffee; harvested coffee is dried using a simple method. And the last method is rush coffee; coffee is roughly processed by the dry processing method. The dry processing method means drying coffee berries by sunlight or by machines (some households buy drying machines), then rubbing them, throwing the skin away and keeping the beans only. Most households carry out all stages by themselves. Only a few households can afford to buy machines for post harvest processing. Almost all households dry coffee by sunlight and then hire machines to process to rush coffee, they do not keep it as green coffee. This method is cheap and easy. About 4.5 tons of green coffee is processed to make 1 ton of rush coffee.<br />Only a small quantity of coffee is sold green after harvest. The major part is sold as rush coffee to agents. The reason for this is that rush coffee has the best price, and processing it is quite simple. According to the research of ICARD, households only sell green coffee when they are in need of money or when they cannot dry coffee because of rain.100% of households sell green coffee to middlemen. A small amount of dry coffee is sold to middlemen or agents. Few farmers sell coffee directly to processing or exporting companies, except for some companies that place orders to buy green coffee from households.<br />The middlemen<br />The roles of middlemen and agents in distribution channel are transporting coffee from farmers to processing or exporting companies. Agents and middlemen buy about 90% of coffee output. There are many agents and middlemen, so the price does not vary much, fluctuating from 50 to 100 VND per kg for each kind of product.<br />Agents and middlemen use two methods to buy coffee:<br />Transporting coffee to sell directly to agents<br />Using their own means of transportation, such as trucks, to buy coffee at farmers’ houses.<br />These agents can be private companies or the subsidiaries at province, commune or village level of processing or exporting manufacturers. The staff of these agents is paid a salary by manufacturers.<br />This network is supported by coffee-collectors who often are neighbors of agents. They have little money so they only collect about from 5 to 200kg coffee per day, and then resell to agents; their profit is the difference between the prices. Most coffee-collectors buy green coffee and come to farms to buy it. <br />Coffee-collectors often have no other activities but collecting-agents are different. After buying coffee, agents often carry out some rough processing activities to remove impurities (with rush coffee processed at households) and dry grind and polish (with dry coffee) to make rush coffee which is sold to processing or exporting companies. Their main profit comes from rough processing activities and collecting (Huyen, 2008).<br />Processing or exporting companies <br />Processing or exporting companies often buy coffee through their own agents or sign a contract with private collecting agents and they often buy rush coffee. Only companies that have wet processing lines buy green coffee from farmhouses. After buying input materials, companies carry out processing of the coffee.<br />In order to export, companies carry out reprocessing to have coffee beans meeting export standards and they classify coffee into different quality levels. But after reprocessing, the coffee still has many imperfections, due to inadequate technology. The export coffee is often affected by three problems: humidity, black and broken beans and impurities. Many customers worry about the safety of Vietnam’s coffee because it is prone to infection by Ochratoxin A. Processing coffee companies carry out roasting and grinding on a s