Wake Up Call: An Uncertain Future for the Vietnamese Coffee Industry

Starting your morning with a cup of coffee is a tradition enjoyed by many worldwide. In fact, coffee is so popular that it’s become the world’s most widely traded tropical agricultural commodity. The countries that produce the most coffee (in order of production) are Brazil, Vietnam, Colombia, and Indonesia.

There are two main types of coffee beans grown—Robusta and Arabica. Robusta beans are seen as lower quality than Arabica, and they’re generally used in coffee blends and instant coffee products. What Robusta lacks in flavor it makes up for in its “robustness” as a plant species. It is able to be grown in hotter and more humid environments, where the more finicky Arabica cannot survive. (Arabica plants prefer cooler, drier temperatures.) Robusta coffee makes up about 30-40 percent of all coffee exported globally, whereas Arabica makes up 60-70 percent. However, many predict that Robusta production will increase due to climate change; as global temperatures rise, more areas may become less suitable for Arabica cultivation.

Since the 1990s, Vietnam has emerged as major player in the global coffee industry. Vietnam is now the world’s second largest producer of coffee; and first largest producer of Robusta. The country was initially very successful in global markets because the cheap domestic costs for land and labor allowed their product to be sold more inexpensively than coffee produced from other countries. However, much of the growth and market share that has taken place in Vietnam is from producing low-quality Robusta beans. In fact, Robusta currently makes up around 95 percent of Vietnamese coffee production.

There are many large foreign players in Vietnam’s coffee industry. The world’s largest coffee distributor Nestlé has developed its business in the region, investing over $200 million in a new factory training 20,000 farmers and distributing more than 2 million coffee plants. Mondelez International has also announced that it will open a coffee training center for Vietnamese farmers, with a total investment of up to $200 million. Mondelez expects to train 1,500 farmers in order to create a stable supply of 7,000 tons of coffee. Starbucks is another foreign company investing in Vietnam’s coffee sector. The firm recently announced it will sell Vietnamese single-origin coffee beans at more than 21,500 shops in 56 countries.

Despite foreign investment in Vietnam, the outlook for coffee production in the country is not optimistic. In recent years, the global market share of Vietnamese coffee has shrunk from 22 percent in 2014 to 18 percent in 2015. In addition, the amount of coffee exported from Vietnam in 2015 was down by 28 percent in volume from 2014 and 30 percent in value. Furthermore, the average selling price dropped from $1.80/kilogram in 2014 to $1.60 in 2015. So far in 2016, the price has continued to fall, and coffee is now selling at $1.46/kilogram, below the average cost of production of $1.47. This price decrease has been fueled by rumors that Vietnam has stockpiled excessive unsold inventory as well as by declining global demand. To further complicate matters, major coffee exporters like Brazil and Colombia devalued their currencies, which helped them boost sales.

There are many challenges facing Vietnam’s coffee industry in the coming years, and in particular climate change and El Nino are expected to negatively affect output. The Vietnam Coffee & Cocoa Association said it expects output to decrease by 10 percent in 2016, partly because of dry weather caused by El Nino. Vietnamese production is dependent on intensive irrigation and fertilizers to grow its coffee crops; this method of production is becoming unsustainable, especially as water becomes more scarce due to climate change.  In addition, Vietnamese farmers with older coffee trees (which make up to a third of total plants) are not replanting their land with new coffee trees, but are instead electing to switch to more profitable crops such as pepper and fruits. This trend will further decrease coffee output in the coming years. Finally, low quality is a huge challenge in Vietnamese coffee production. For example, it is common for ripe and unripe berries to be mixed together in the harvest.

One quirk of Vietnam’s coffee output is that the majority of the beans they export are not processed. Processed coffee accounts for only 7-8 percent of the country’s total coffee output. Although investing in processed coffee products can bring about bigger profits, local companies have not done this for fear of competing against major corporations worldwide. For years Vietnam has supplied raw materials for the world’s coffee roasters, but the country itself does not have a recognizable coffee brand. In its coffee development plan, the Vietnam Coffee & Cocoa Association aims to have processed coffee output make up about 30 percent of the country’s total output by 2020. In this way the organization hopes to boost the profitability of the sector.

However, this strategy may be difficult to achieve due to the type of beans Vietnam currently produces. Robusta is considered less desirable for specialty coffee, and switching to Arabica production requires strict ecological conditions. While Vietnam does have a few areas that meet these conditions, to grow enough of this variety for export requires a large output and stable source of supply—which Vietnam currently lacks. In addition, Arabica coffee beans require wet processing which necessitates the use of expensive capital equipment. Most small farmers do not have access to the capital required to purchase this equipment. Furthermore, most of the country’s coffee is grown in the western highlands, where the low elevation and lack of shade are inhospitable to Arabica plants. Farmers are also reluctant to take their land out of production in order to replant it with Arabica beans.

While Vietnam has enjoyed many years of increasing production of coffee, the future will present numerous challenges to the industry. In order to compete, Vietnam will need to try to increase the quality of the beans it produces and to develop its capacity for creating processed coffee products.

 

Lauren Cecil

MBA Candidate 2016