The Sustainable
Coffee Program
A business case
for sustainable coffee production
UGANDA & ETHIOPIA CASE STUDIES
February 12th, 2014
Ted van der Put, IDH
Paul Stewart, TechnoServe
CONTENTS
 Background
 Uganda
 Ethiopia
2
CONTENTS
 Background
 Uganda
 Ethiopia
3
ETHIOPIA AND UGANDA ARE BEHIND THE GLOBAL AVERAGE
“Sustainable” sales* as share of total exports
2011/12 crop year
Brazil
Vietnam
88%
98%
Conventional exports
"Sustainable" sales*
20
9%
97%
Uganda
25
12%
91%
Ethiopia
Total exports
Bags, MM
3%
2%
3
3
8%
Global Average
“Sustainable” sales**
* “Sustainable” includes Utz, 4C, RF, Fair Trade, Organic certified and/or verified coffee exports
** Global exports estimated at 100MM bags in 2011/12, of which 8.1MM bags “sustainable”; does NOT count Nespresso AAA or Starbucks C.A.F.E. Practices
Source: UCDA; TCC Coffee Barometer 2012
4
NOT ALL COUNTRIES MAY BE ABLE TO MEET THIS DEMAND
Volume per farmer
kg green
Declining
competitiveness
10,000
Brazil
Costa Rica
El Salvador
Honduras
Peru
1,000
Nicaragua
Mexico
Rising
production
costs
Indonesia
Ethiopia
Tanzania
100
Guatemala
Colombia
Uganda
Kenya
PNG
High farmer numbers,
regulatory constraints
Rwanda
Burundi
10
100
1,000
10,000
100,000
GDP per capita
US$ (real)
Source: World Bank; TechnoServe analysis
5
CONTENTS
 Background
 Uganda
 Ethiopia
6
UGANDA HAS 1.7 MILLION COFFEE FARMERS, 18% OF THE WORLD’S
TOTAL
Latin
America
Asia
Brazil
Colombia
Vietnam
Indonesia
9.4 mln farms
3%
5%
9%
Rest of Latin America
5%
5%
Rest of Asia
16%
8%
Africa
Tanzania & Kenya
8%
Rwanda & Burundi
11%
Ethiopia
13%
Uganda
18%
Rest of Africa
Coffee Farms
Source: UCDA; TechnoServe analysis
7
MOST UGANDAN COFFEE FARMERS GROW COFFEE WITH OTHER CROPS
TO MANAGE RISK
Representative Ugandan smallholder farm distribution of different crops
1.0 ha
Fruit, Veg,
Tubers
20%
Beans
14%
Maize
18%
Bananas
30%
Coffee
18%
Crop land use
* Based on Uganda agricultural census data, which does not explicitly adjust for intercropping
** Net income (after deducting cash costs); food crops assigned value on the bases of end-of-harvest prices
Source: Uganda agricultural census (2008/9), World Bank, UCDA; TNS primary data collection and analysis for income from other crops
8
MOST UGANDAN COFFEE FARMERS GROW COFFEE WITH OTHER CROPS
TO MANAGE RISK
Representative Ugandan smallholder farm distribution of different crops
1.0 ha
Fruit, Veg,
Tubers
20%
Beans
14%
Maize
18%
Bananas
30%
$350
3%
5%
9%
29%
54%
Coffee
18%
Crop land use
Household income from cash
crops (excl own consumption)**
* Based on Uganda agricultural census data, which does not explicitly adjust for intercropping
** Net income (after deducting cash costs); food crops assigned value on the bases of end-of-harvest prices
Source: Uganda agricultural census (2008/9), World Bank, UCDA; TNS primary data collection and analysis for income from other crops
9
AS RESULT OF LAND INHERITANCE TRADITIONS, UGANDA’S FARM SIZES
HALVE WITH EACH GENERATION
Average smallholder farm size in Uganda
All crops, Hectares
8
7
6
1965
4 ha
5
4
1990
2 ha
3
2012
1 ha
2
1
0
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Uganda agricultural census (2008/9), World Bank, UCA; TNS analysis
10
UGANDA’S SUPPLY CHAIN IS MORE EFFICIENT THAN OTHER EAST
AFRICAN ORIGINS
Efficiency levels of selected coffee supply chains, 2012/13
US$ per pound green
$0.91
6%
$1.34
$0.95
$1.15
$1.82
25%
28%
30%
$1.29
10%
Supply chain share
40%
94%
(aggregation, processing,
exportation, taxes, etc.)
90%
75%
72%
Farmer share
70%
60%
Vietnam
(Robusta)
Export (FOB) price*
Brazil
(Unwashed
Arabica)
Uganda
(Robusta)
Uganda
(Unwashed
Arabica)
Kenya
(Washed
Arabica)
(before harvesting and
other on-farm costs)
Ethiopia
(Unwashed
Arabica)
* Prices are normalized to 2012/13 average commodity prices – Arabica (ICE “C”) $1.50, Robusta (LIFFE) $2000 per ton ($0.91/ lb), but adjusted for
market differentials
Source: trade statistics; TechnoServe analysis and interviews in Brazil, Colombia, Ethiopia, Kenya, Uganda, and Vietnam in 2012/13
11
THERE IS AN OPPORTUNITY TO LIFT UGANDA’S EXPORT REVENUES BY
$284M AFTER 10 YEARS THROUGH IMPROVED AGRONOMY
Coffee exports at current prices
US$ millions per year (steady state, year 10)
Current exports*
Additional exports
Potential exports
in 2023
Currently, coffee represents
18% of Uganda’s export total of
$1.6 billion
379
Additional exports based on
yield improvement scenario
only (increases in land use or
prices are not included).
283
662
Further gains expected beyond
2023 when full effect of training
is realized.
* 2010/11 export volumes modeled at current Ugandan export prices for Robusta and Arabica, i.e., LIFFE of 2000 and ICE at 150
Source: TNS analysis
12
SMALLHOLDER YIELDS COULD BE DOUBLED THROUGH IMPROVED
AGRONOMIC PRACTICES
Yields could double *
Kg green coffee per hectare
1,500
Current
Potential
1,000
Through improved agronomic practices
•
Tree rejuvenation (stumping/pruning)
•
Fertilization
$54
•
Gradual replanting
$15
•
Integrated pest management (IPM),
e.g., to control Twig Borer
$0
•
Optimized intercropping
$0
•
Total cash costs
$74
•
Overall farm management (labor)**
$46
656
474
Robusta
Arabica
Incremental costs
USD/farmer, Av 10
year
* According to stakeholder interviews and ongoing projects (e.g., HRNS)
** Typically family labor, so not a cash cost
Source: UCDA; IITA; AMITSA; literature review; interviews with farmers, Ministry of Agriculture, and coffee projects; TNS analysis
$5
13
YIELDS COULD BE INCREASED WHILE MINIMIZING THE UPFRONT
INVESTMENTS REQUIRED BY FARMERS
Potential impact of intensive agronomy training on farmer income
Simple farmer profit and loss statement, US$ per year
700
ROBUSTA EXAMPLE
Increased income after Year 3 puts
farmer in a better position to pay
for sustainability improvements
600
500
283
400
316
329
336
344
351
359
Net
income
230
300
180
200
180
192
Revenues
100
0
Expenses
-100
Year 0
1
2
3
4
5
6
7
8
9
10
Key assumptions
•
•
•
•
0.18 ha farm, 120 to 275 kg (green) production increase
Rejuvenation / replanting cycle carried out over 10 years
Gradual increases in fertilizer use over time (e.g., increasing to 300 g/tree of NPK)
Farm-level investments (e.g., fertilizer, farm equipment, etc.) could be financed out-of-pocket or through
linkages with banks and/or microfinance; the maximum amount reaches $75 per farmer in Year 4
• Training cost of $40 in Year 1, $30 in Year 2 (Total of $70) is not included
Source: TNS analysis; TNS East Africa results with 30,000 farmers
14
A RENEWED FOCUS ON FARMER NEEDS WOULD CREATE SYNERGIES TO
BOOST FARMER PRODUCTIVITY AND MEET SUSTAINABILITY CRITERIA
High
▪
▪
▪
▪
▪
▪
Higher yields
New trees
Competitive options
Reduced production costs
Pest / disease control knowledge
Access to credit
What farmers
want
▪ Protective equipment / safe
▪
▪
▪
▪
agrochemical use
Farm waste management
Drinking water testing
Recordkeeping
Planting of indigenous trees
Low
Low
High
What standards require
15
FOR CERTIFICATION TO TAKE-OFF, THE ECONOMICS WOULD NEED TO
IMPROVE
Cost of farmer-level trainings and audits*
US$ per ton exported as “sustainable”
294
Uganda
93
Ethiopia
Brazil
Vietnam
=
Est. annual cost per farmer
US$, training and audits
8
0.03
6
0.1
34
17
/
Exports per farmer**
Metric tons green coffee
90
10
2.6
0.6
50
Current premium***
* Cost included auditing, training and Internal Control System (ICS) management
** Assumes 25% of farmers’ total coffee production is sold and exported as “sustainable” coffee for all countries
*** According to exporters interviewed
Source: TNS analysis; stakeholder interviews; field visits
16
DIFFERENT ACTORS WILL NEED TO CO-INVEST TO ACHIEVE THESE
GAINS
Actors
Farmers
Processors
and
exporters
Roasters
Government
of Uganda
Co-investment role
 Adopt good agricultural practices and make other farm-level
investments to improve yield and sustainability
 n/a
 Invest in efforts to upscale sourcing of Ugandan coffee and
support partnerships that enhance sustainable production and
farmer incomes
 Support national agronomy and sustainability curriculum
17
CONTENTS
 Background
 Uganda
 Ethiopia
18
ETHIOPIA HAS A COMPETITIVE ADVANTAGE IN ARABICA AS THE
WORLD’S NEW LOW-COST PRODUCER
Cost of production in 2013
US cents/lb*
Cost of production trend
US cents/lb*
120
100
80
1.10
Brazil
(Arabica)
Ethiopia
0.75
0.13
Farm-to-export
0.43
Other farm-level**
0.36
Agro-inputs
0.18
Labor*
60
0.51
40
20
0
2004
0.10
0.02
0.12
2013
Ethiopia
* Cash costs of production and depreciation, excludes value of family labor
** Includes maintenance, depreciation, financing, mechanical harvesting, fuel, and primary processing (hulling)
*** Based on Cerrado area of Minas Gerais; large mechanized farm (>60 ha, yielding 32 bags/ha)
Source: P&A; TechnoServe analysis
Brazil***
(large Arabica)
19
HISTORICALLY, LOW-COST PRODUCERS HAVE RISEN IN TERMS OF
PRODUCTION AND GLOBAL MARKET SHARE
Robusta exports in 1992 versus 2012*
Bags (60-kg), millions
Arabica exports in 1992 versus 2012*
Bags (60-kg), millions
70.5
62.7
29.8
Brazil
40.9
40.6
Rest of
the world
1992
2012
21.9
43.4
24.2
Vietnam
21.8
1.9
19.9
19.2
1992
2012
* Estimated raw (green bean) exports
Source: USDA; TechnoServe analysis
Rest of
the world
20
ETHIOPIA IS ON A TRAJECTORY TO GROW ITS MARKET SHARE
Total Arabica coffee production
Bags (60-kg), millions
Ethiopia
trajectory*
13
12
Colombia
Production
(2013)
11
10
9
8
7
+6%
6
5
4
3
2
1
0
2004
2006
2008
2010
2012
2014
2016
2018
2020
* Assumes year over year growth of 6%
Source: Ministry of Agricultural and Rural Development (MoARD); USDA; ICO; market reports; TechnoServe analysis
2022
2024
21
THIS GROWTH WILL COME FROM SMALLHOLDERS, WHO CONTRIBUTE
90% OF TOTAL PRODUCTION
Ethiopian coffee farm size distribution
Farm size
classification
Area under
coffee (ha)
Number of
farms
Share of
production
Small
<5
1,200,000
91%
Large
5 to 50
1,000
2%
Plantations
> 50
200
7%
Totals
1.0 million
1.2 million
6.3 m. bags
Source: Ethiopia Central Statistical Agency for farm size distribution; TechnoServe analysis and estimates of area, farms and production breakdown
22
SMALLHOLDER FARMERS’ YIELDS AND INCOMES HAVE POTENTIAL TO
INCREASE
Smallholder yield potential
Kg green coffee per hectare
Smallholder net income potential
US$ per year
+100%
+75%
500-700
250-400
Current*
$700
$400
Potential
Current
Potential
* Based on yield surveys conducted in Western and Southern Ethiopia (n=954) using weigh-scales and GPS land measurements in 2012/13
** Modeled at NY C Arabica price of 150 c/lb and average FOB differential of -5 c/lb, assuming supply chain costs remain constant
Source: TechnoServe analysis
23
ON A NATIONAL SCALE, THIS COULD GENERATE $1 BILLION IN NEW
EXPORT SALES BY 2023
Current estimated production and exports
Bags (60-kg), millions
Estimated
revenues of
$0.7 billion*
Potential if yield can be doubled in 10 years
Bags (60-kg), millions
Estimated
revenues of
$1.7 billion*
12.5
3.7**
8.8
6.3
2.8
3.5
Production Domestic
Exports
Production Domestic
Exports
* Assumes average export price of $1.45 per pound green (FOB Djibouti); also assumes differentials and quality ratios keep pace with production growth
** Assumes domestic consumption grows at 3% year over year for the next 10 years
Source: TechnoServe analysis
24
INDUSTRY-WIDE EFFICIENCY GAINS COULD DELIVER $50 MILLION PER
YEAR BACK TO FARMERS
Potential cost-savings for Ethiopian coffee industry through investments in sustainability
and increased efficiency at processors
US$ millions per year
Wet mills
Current
size of
industry
(3.5M bags
exports)
Potential
future
size of
industry
(+5.3M bags
exports)
Hulling stations
Potential
cost savings
Wet mills
Hulling stations
Potential
cost savings
* If $35 per farm can be achieved after program reaches scale
** At current prices; see analysis on page 28
5
14
19
7
22
48
25
AT WET MILLS, AS AN EXAMPLE, ECO-PULPERS COULD REDUCE WATER
CONSUMPTION 80% AND SAVE OPERATING COSTS
Average water consumption by wet mill type
Liters per kg green coffee
Average operating cost by wet mill type
US cents per pound green
20
-83%
>60
5
14
1
Utilities
6
Labor
2
Depreciation/
maintenance
3
3
Financing
2
2
Admin
Traditional
Wet Mill
Ecologic
Wet Mill
6
4
<10
Traditional
Wet Mill
Ecologic
Wet Mill
Source: Interviews with cooperatives and private wet mill owners; pulping machinery manufacturers; TechnoServe analysis
26
THIS WOULD ALSO HELP ADDRESS SUSTAINABILITY COMPLIANCE
ISSUES AT WET MILLS
Sustainability
challenges
Environmental
Social
Economic
Wet mills (washed supply chains)
• Improved wastewater and pulp
treatment
• Reduced water consumption
• Worker benefits
• “Fair” wage
• Protective equipment, first aid, health
and safety training
• Payroll documentation
• Drinking water and sanitary facilities
for workers
• Receipts, farmer records and other
financial transparency documentation
• Annual audits
27
AT HULLING STATIONS, INVESTMENT WOULD RESULT IN IMPROVED
EFFICIENCY AND SUSTAINABILITY COMPLIANCE
Hulling station – Cost benefit analysis of investments
US cents per lb green
8.6
4.4 c/lb
Net savings
6.5
(higher throughput)
4.2
2.0
(ongoing
compliance*)
2.2
2.1
(amortized upfront
investments**)
(utility, labor and
other cost savings)
Costs
Benefits
* Includes improvements in water and energy tracking, labor policies, working conditions, documentation
** Includes investments in upgraded machinery as well sustainability focused investments, e.g., waste treatment
Source: TechnoServe analysis
28
INVESTMENT AND TRAINING WOULD HELP ADDRESS SUSTAINABILITY
COMPLIANCE ISSUES AT HULLING STATIONS
Sustainability
challenges
Hulling stations (unwashed supply chains)
Environmental
• Husk storage and recycling system
• Reduced energy consumption
•
•
•
•
Social
Worker benefits
Children and pregnant women
“Fair” wage
Safe working conditions (noise, dust,
machinery)
• Protective equipment, first aid, health and
safety training
• Payroll documentation
• Drinking water and sanitary facilities for
workers
Economic
• Receipts, farmer records and other financial
transparency documentation
• Annual audits
29
DIFFERENT ACTORS WILL NEED TO CO-INVEST TO ACHIEVE THESE
GAINS
Actors
Farmers
Processors
(unwashed
and washed)
Roasters
Government
of Ethiopia
Co-investment role
 Adopt good agricultural practices and make other farm-level
investments to improve yield and sustainability
 Make investments to improve compliance with sustainability
standards and increase quality and efficiency
 Invest in efforts to upscale sourcing of Ethiopian coffee and
support partnerships that enhance sustainable production and
farmer incomes
 Review policy environment to promote supply chain efficiency,
competition and new investment
30
The Sustainable
Coffee Program
FOR FURTHER INFORMATION:
IDH Sustainable Coffee Program:
Paul Klein Hofmeijer [email protected]
Ted van der Put, [email protected]