The mighty bean

By: Stephen Brooks & Dane Wetschler - Posted on: May 5, 2010 | Business

Southeast Asia has succumbed to the world’s most popular stimulant, and now it’s getting ready to take its own coffee buzz to the world. Take a closer look at that cup of dark liquid you hold in your hand every morning. It’s one of 730 billion cups that will be consumed worldwide this year. It’s the end product of a global supply chain involving more than 70 coffee-producing countries, affecting the livelihoods of 25 million people from Panama to New Guinea. It’s the roasted, ground seeds of an evergreen shrub native to the highlands of Ethiopia. It’s a psychoactive drug, and it’s the second biggest commodity in the world. Whether you are a Bangkok businessman or a Mekong traveller, chances are you need it. It’s Java, black juice, coffee.
With the exception of tiny lowland Brunei, every country in Southeast Asia produces coffee. The second and third-largest producers in the world are Asean members: Vietnam and Indonesia, respectively. The northern region of Thailand has been identified by the International Coffee Association (ICO) as having prime climatic, geographical and soil conditions for the cultivation of specialty coffee. Laos has recently become known on the international market as a new and exotic source of premium beans. Even Cambodia and Myanmar produce tiny, but increasing, quantities of coffee for local and regional markets.

Even parts of Asia that have been tea territory for millennia are succumbing to the stronger kick and globalised image of the black brew.

“Tea is for old people. Young people in Asia drink coffee,” states Nguyen Phuong, a Vietnamese university student from Ho Chi Minh City.

Coffee has indeed become a vital and growing sector of Southeast Asian economies, but it has also made an indelible imprint on the cultures of the region. Instant coffee is common in grocery stores and homes across the region – while trendy coffee shops are becoming an essential part of the urban landscape from Jakarta to Hanoi. Far from being passive consumers of an imported lifestyle and foreign mega-chains, Southeast Asians have created their own unique brands and identities: homegrown coffee shop chains, national associations and barista competitions.

Proving that coffee has always been in the forefront of revolutionary ideas and innovative business practices, Trung Nguyen, the first licensed franchise in the history of Vietnam, has in 14 years, grown from a small café in the central highlands town of Buon Ma Thuot into one of the country’s most successful private businesses. But CEO and founder Dang Le Nguyen Vu, recipient of the Asean Young Innovator Prize, and known locally as the “King of Coffee,” was not content to dominate only the domestic market. Since 2002, fuelled by the slogan “bring new inspiration,” Trung Nguyen has opened branches in Singapore, Thailand, Japan and other countries, spreading Vietnamese-style coffee culture around the world and becoming one of the few well-known Southeast Asian brands.

Starbucks, with over 6,000 outlets in the US alone, is the world’s most popular coffee brand (Todd Huffman) What’s more, Trung Nguyen has translated its coffee success into the nascent Vietnamese retail market. In 2007, a subsidiary of Trung Nguyen launched the G7Mart retail network, which aims to become the largest convenience store chain in Vietnam by being a “pioneer of modern distribution in Vietnam”. As trade liberalisation comes into effect, Trung Nguyen looks well placed to compete not just with Starbucks and Coffee Bean & Tea Leaf, but also with that ubiquitous symbol of American retail might: 7-11.

The dusty, remote provincial capital of Buon Ma Thuot seems an unlikely birthplace for an international coffee empire. But drive north from Buon Ma Thuot towards Pleiku or south towards Dalat and you will see a countryside blanketed in the dark green leafs of the coffee shrub. Since the hilly landscape doesn’t permit large, expansive estates, most of the farms one sees are no more than a few hectares. Even modest roadside shacks have a few shrubs in their backyard for extra income. Thirty years ago, the country was recovering from decades of war and ecological devastation. Coffee production was almost non-existent. It has been within the last two decades, coinciding with the introduction of market-based reforms and tax incentives in the late 1980s, that the Vietnamese coffee industry has gone skyward. In 1990, Vietnam’s coffee output was 200,000 tons, and by 2000 it had more than tripled to 700,000 tons. Today, over a million tons are produced annually, 15% of the world’s total and second only to Brazil.

The “big four” coffee roasters, Sara Lee, Kraft, Procter & Gamble and Nestlé, buy nearly half of the world’s supply, much of which hails from Vietnam’s central highlands. Vietnam is often seen as the culprit behind the 2000-2005 coffee crisis, when a massive glut in the market led to a downward spiral in prices, devastating producers worldwide. Although oversupply certainly played a prominent role in tumbling coffee prices, a more subtle, but perhaps ultimate, cause is to be found in how coffee is inaccurately valued – like corn, copper and coal – as a commodity.

More chemically complex than wine, coffee should be valued as a luxury product, not a commodity. At each level of the supply chain – cultivation, harvesting, de-pulping, washing, drying, storing, roasting and brewing – coffee requires a great level of care. From washing the raw, green bean to pulling a 1.5-ounce shot of espresso, value is added to or taken away from the final product. The most perfectly roasted bean can taste like bitter dirt if handled by a bumbling barista, while the most elaborate rosetta leaf latte-art can do nothing to mask the defects of low-grade coffee. As such, the homogenous pricing of coffee as an exchange commodity fails to reflect the wide range in quality available on the market and the costs that went into producing those coffees.

Boasting the largest expatriate community and the most coffee shops of any city in any Southeast Asia, Bangkok is a microcosm for the development of the Southeast Asian coffee industry. It’s not difficult to find a coffee shop in Bangkok; it is next to impossible to find one that serves up a palatable cup.

Condensed milk and syrup is often applied generously to defect-ridden coffee plied upon caffeine enthusiasts across the country. Pang, the owner of Kaffee Hub in Chiang Rai and 2009 Northern Thailand Indie Barista champion sings the lament of many Thai baristas: “Thai people like to have their coffee with a lot of milk and sugar. If they’re not used to drinking coffee, they’ll usually get a mocha.” Why, in a country that has great potential to produce top-notch specialty coffee, has Thailand’s industry developed in such a lopsided manner?”

“Thais like to have their coffee with a lot of milk and sugar – if they are not used to coffee, they order mocha”

Similar to Vietnam, most coffee produced in Thailand is of the robusta variety.

Originally, brought to the Saba Yoi sub district of the Kingdom’s southern Songkla province in 1904, robusta accounts for about 94% of domestically produced coffee today. This is the kind of coffee you’re more likely to encounter dissolved in a can or pulled through a filter cloth by a street vendor. Compared to arabica, the caffeine content is higher, the taste is generally less apparent and the price much lower.

Robusta grows at a lower elevation than arabica – its potentially gourmet counterpart – so it has a higher moisture content, thus maturing faster and lending it a less complex taste. The upshot is it’s easier to produce, cheaper to harvest, yields more abundantly and frequently, and can withstand greater climactic variation. Arabica on the other hand, must be grown at least 800 metres above sea level, yields once per year, requires manual harvesting and greater care at all levels of production.

The plethora of coffee shops in Thailand would seem to suggest there is demand for and presence of premium coffee. Arabica– typically the stuff of your $2 shot of espresso – is mostly grown in northern Thailand. Introduced to farmers about 20 years ago, arabica was part of the Hill Tribe Development Royal Project’s effort to eradicate opium and develop an alternative agro-industry. The project gave free coffee seedlings and provided a market to buy the farmers’ un-milled beans. Unfortunately, most farmers did not learn how to grow, pick, wash and dry coffee to yield high grades.

“If farmers don’t know they can receive a higher price for producing a higher quality bean, the buyer can reap the profit margin where the farmer should receive a higher price,” says Meechai Amornpathanakul, a specialty coffee consultant and educator.

Farmers see little incentive to investing the extra time and care needed to produce a specialty product for two main reasons: the domestic coffee market has faced no external competition due to a 90% import tax on coffee, and the Royal Project guaranteed a market.

Thailand’s agricultural sector has enjoyed the protection of high tariff barriers on a range of products since 1992. According to a Common Effective Preferential Tariff (CEPT) scheme, Asean member countries agreed to keep trade open between one another and impose high import tariffs for non-Asean products under the condition that by the year 2010 member countries would enter the Asean Free Trade Area (AFTA) and open markets to foreign imports, reducing tariffs to 0 to 5%. Coffee, categorised as a highly sensitive product, is exempt from the agreement, meaning that imported specialty coffee is available in supermarkets and few coffee shops, but at a much higher price than its domestic counterpart.

What does all this mean for your cup? On one hand, more coffee shops will be able to serve imported premium coffees that were previously unfeasible due to the high tax. This means more market variety and gourmet options for you. On the other hand, the influx of cheap coffee from neighbouring coffees should be cause for serious concern.

Open trade exposes Thailand to some of the world’s worst quality coffee. Thailand’s ministry of agriculture sets the limit of Ochratoxin–A, a carcinogen found in low-grade coffee, at 20 microns/kg – four times the WHO standard. Not only could the import of low-quality coffees deprive the tens of thousands of coffee-farming families of their livelihoods, it poses a serious health risk to uninformed consumers. Shady marketing campaigns by domestic coffee suppliers, a disjointed regulatory apparatus and a low consumer awareness contribute to what could become a dumping ground for low-quality coffee.

Farmers and academics criticise the government for not using the grace period to develop the competitiveness of Thai coffee. The fear is that cheaper coffee will enter the market from neighbouring countries – where the cost of production is lower – and deprive an estimated 29,000 families of a market for their coffee.

“When consumers don’t consume high quality coffee, big coffee buyers and roasters in Thailand will buy from the cheapest source,” says Meechai. Since most coffee in the domestic market is of low grade, farmers are at risk of losing their buyers to international competition. That northern Thailand’s coffee region is suitable for growing specialty coffee suggests an alternative model that could ensure the future development of coffee cultivation and the Thai coffee industry on the whole.

“The project will make the quality of coffee better for export to international markets.

Enter the Doi Saket village coffee education pilot project – a bid to educate farmers of the production and processing of high-grade coffee. With education comes an alternative model of coffee marketing in which buyers pay higher prices directly to farmers in exchange for the extra labour and care required to produce a high-quality product.

Project leader Jaran Khantapiang is already declaring it a success. “The project will make the quality of coffee better for export to international markets. Last year we received $2.5/kg of un-milled coffee by domestic buyers and the royal development project. After we mill and sort the beans ourselves, we can sell high-quality beans for $4/kg.” Such a scaling up of production quality takes time. In the future, Jaran predicts the families involved will be able to sell peaberry coffee (the highest grade) for at least $6/kg and A and AA grades for higher than what they are selling now.

That said the conventional model elsewhere in Thailand and most of Southeast Asia entails buyers selling beans at low prices according to weight, allowing the buyer to reap the value added to high-grade beans.

Jaran warns, “farmers growing low quality coffee will receive a lower price in the future, but it will not force them to switch to growing another crop. How can they? They’ve been growing coffee for twenty years. They wouldn’t know what else to grow.” AFTA will simultaneously pose opportunities for farmers who work to make a more competitive product and punish those who are not given the resources to adapt to market conditions.

More initiative by the state would help farmers and consumers alike respond to the potentially negative consequences of trade liberalisation and reap the benefits of free trade and more competitive markets.

THE BEAN THAT RULES THE WORLD

Entire countries have become economically addicted to the beverage-bush. In Ethiopia, where coffee was first discovered in the 9th century, one out of four people are employed in the coffee business, which contributes to 65% of the country’s exports. In Colombia, coffee employs 36% of the rural workforce; in Burundi, 80%. Over-dependence on this single cash crop has left many producing countries highly vulnerable to the volatile price of coffee. When the price drops, the social and economic consequences are often disastrous.