Vietnam Central Highlands

"Enhancing the competitive position of coffee production in the Central Highlands of Vietnam"

Introduction

One of the key outcomes of the Vietnam sector development project was a common agreement on the major areas of improvement that are needed to enhance the sustainability of the coffee sector in Vietnam. Priorities that were identified, amongst others, are the needs to:

• Organise coffee producers to reap benefits of economies of scale
• Improve consistency of coffee quality
• Increase sectoral coordination
• Enhance sectoral competitiveness

As DE Foundation we have been instrumental in the run up to and design of the Vietnam coffee sector development strategy. For us, continued cooperation with Vietnam was natural. To help address some of the identified priorities in the sector development strategy, we formed a partnership with the Rabobank Foundation and the Dutch Ministry of Economic Affairs, Agriculture and Innovation (EL&I). Each partner brings in specific expertise, complimenting that of the others. The Rabobank Foundation is very experienced in helping establish farmer organisations. EL&I acts as a bridge between the other partners and the Ministry of Agriculture and Rural Development (MARD) in Vietnam.

The Central Highlands project will build on lessons from previous projects in the region by a variety of organisations. In these projects, the focus was often on introducing Good Agricultural Practices and certification. The difference with previous project, apart from operating on a larger scale, is that the Central Highlands project will pay more attention to the development of farmer-led cooperatives. One of the key objectives is to help establish 3 cooperatives, 1 in each of the 3 main coffee producing provinces in Vietnam. This is expected to help farmers benefit from economies of scale. For instance, when buying fertiliser, which is typically one of the larger annual investments, a group of farmers may be able to buy directly from a factory, which cuts out the margin of the middleman. When selling coffee, a group of farmers than can offer a large volume of consistent quality can negotiate better prices from buyers. By bulking coffee, farmer groups may get enough coffee together to fill a truck. When that happens the group can start taking care of up-country logistics too. Taken together, all these seemingly small steps can add up to some serious margin improvements, 20-30% is not unheard of. Also in certification processes, a farmer group is important, as individual farms are too small to be certified cost-effectively. Where farmers are not organised in groups it is often a large exporter that takes the initiative to organise a basic level of grouping to facilitate certification. In this project we try to get farmers to take of that side of the business too. This will allow the group members to sell coffee to any buyer of certified coffee instead of only to the exporter that took the initiative to group them in the first place. Other potential winnings from group formation are that it will allow farmers to better negotiate with service providers such as banks and research and extension centres.

To function properly, a cooperative has to make a margin with which it can finance service provision to its members. In many places the cooperative buys coffee from members and, after some processing, sells it on to exporters or coffee roasters. The coop tries to make a margin on the sales of coffee. This is a very risky strategy because of the volatility and unpredictability of coffee prices and is one of the main reasons why cooperatives in coffee fail. At the time of buying coffee from members, the coops do not yet have buyers and in fact do not know what price they will get. In those cases where the coops do have buyers lined up in advance of the harvest, the risk they run is that of a rising market. In that case members may be unwilling to sell at the price that was agreed beforehand, and consequently the coop has difficulty meeting its delivery obligations.

To avoid the large financial risks associated with trading activities, the coops in this project are making their margin on service provision instead. Service provision can range from processing and logistics to training on agronomy. For members these services are provided at cost, whereas non-members pay extra.

Focus of the project

The current challenge is to address development of economies of scale by establishing business-oriented farmer organisations which can manage certification independently, offer certified and conventional coffee to any exporter, provide technical advice on farming practices to its members and move up in the value chain by offering processing and warehousing services.

Activities

Key activities for this project are to:

• Establish one farmer organisation per selected province provides services to its member, e.g. processing, warehousing, marketing, extension training, etc
• Improve coffee quality, promote sustainable production and increase the coffee sector competitiveness through awareness raising campaigns and a Farmer 2 Farmer training programme on Good Agricultural Practices GAP) and Entrepreneurial skills
• Promote and disseminate lessons learnt for scaling up

Results

During project implementation it became clear that more effort was required in 2 of the 3 provinces before farmer organisations could be established. However, the first cooperative, new style is now operational in Lam Dong province, see also the highlights. In Gia Lai and Dak Lak more input on community building is taking place to increase social cohesion within communities, that often consist of relatively recently arrived settlers and ethnic minorities. The Lam Vien cooperative in Lam Dong meanwhile is fairing quite well. It is conducting negotiations with local banks to obtain operational credit for its members. As part of the service provision component, the cooperative, with project support, is negotiating with fertiliser manufacturer Yara to obtain fertiliser directly from the factory, thereby cutting out the middlemen. and better payment terms. Prospects look good with 80% of the coop membership keen to buy fertiliser in this way.

Farmer Field Books are being kept by a large number of farmers, over 800 in total. Training on GAP on a Farmer 2 Farmer basis has been changed by incorporating a training division in each cooperative. This could open a modest additional revenue stream for the coop by offering trainings at a margin to non-members (and to members at cost).

Partners

• Rabobank Foundation
• Ministry of Economic Affairs, Agriculture and Innovation

Contact

Dave D'haeze: dave.dhaeze@ede-consulting.com