The fact that coffee prices have continuously increased can be seen as a good sign but experts warn that enterprises should not speculate on coffee for a longer time as prices may not be so attractive from mid-April. In the first months of 2006, coffee prices increased continuously. Due to unfavourable climatic conditions, not only in Vietnam but also in other exporting countries, such as Brazil and India, a shortage of world supplies has been seen. At the same time, speculators have increased their stock.
Grasp all, lose all
According to forecasts, the Vietnamese coffee output in 2006 will be between 20 and 30 per cent lower than the previous year, reaching around ten or 10.5 million bags, or between 600,000 and 630,000 tonnes. The figure may reach 650,000 tonnes if the stock volume is added. An increase in coffee price is good news but not for farmers as they sold out after they harvested. Traders and export enterprises are very happy but their coffee stock volume is not high.
According to information from the Vietnam Coffee and Cocoa Association (Vicofa), the price of Robusta coffee delivered in May 2006 in Tokyo increased by 5.8 per cent against the same period last year, of the highest increase since December 1999. Alongside a forecast of an increase of coffee output in the next crop year, many export enterprises have signed forward contracts. In March, Vicofa warned enterprises of not signing forward contracts to minimise risks of ups and downs of the market. An increase in coffee prices is a double-edged sword. In fact, some enterprises have suffered losses with their forward contracts.
Despite a forecast on an increased output of coffee in the world and currently attractive prices, Vicofa’s warning has a sound basis. This is because at present and in the future, underground water sources in the Central Highlands will become exhausted, while prices of petrol, oil and fertiliser will increase unceasingly, producing impacts on input costs and productivity. In regions with large coffee growing areas such as South America, climatic conditions may experience complex changes. As a result, the supply may not be able to meet the demand next year.
Occupying ‘number one’ position but not dominating the market
It is possible to say that Vietnam occupies the ‘number one’ position in the world in terms of Robusta coffee growing area and quality. At its peak, the total output of Vietnamese Robusta coffee output may reach 15 million bags, equal to 900,000 tonnes. Half of the export volume of Robusta coffee in the world comes from Vietnam. Most Robusta coffee growing areas in Vietnam are concentrated in the Central Highlands with favourable geographic conditions. However, prices of Vietnamese Robusta coffee are often lower than other countries and profits are not high. This has resulted from poor post-harvest processing technology.
Other exporting countries have tended to increase their export for processed coffee products. They have applied wet processing technology while Vietnamese enterprises still use dry processing technology, which produces a negative impact on the quality and productivity. As a result, despite its number one position in the world, Vietnamese Robusta coffee fails to dominate the market as Robusta coffee does not have high value and it can be used for processing instant coffee only.
Solutions for investment yet to be found
The world prefers Arabica coffee to Robusta. As a result, 70 per cent of the world consumes Arabica coffee and only 30 per cent consumes Robusta. Prices of Arabica coffee are between 20 and 30 per cent higher than prices of Robusta coffee. The gap may even increase to 50 per cent. However, Vietnam’s approaches on developing Arabica coffee have not met the progress requirements yet.
Experts warned that it was strange as prices of Robusta coffee remained on the rise until March. However, enterprises should not wait for higher prices. The best time for enterprises to sell coffee is the interval between crops of large producing countries such as Brazil and Indonesia in early April. The world output in the 2006-2007 crop year is around 7.3 million tonnes while the demand is around 7.1 million tonnes.
Doan Trieu Nhan, vice chairman of Vicofa, said that Vietnam had favourable conditions to develop Arabica coffee. Climatic conditions in North-western Vietnam are suitable with the species of coffee. The region has the same conditions as Sao Paolo (Brazil), the leading coffee growing area in the world. Vietnam now has around 23,000 hectares under Arabica coffee while total area for growing Robusta coffee reaches 500,000 hectares. Vicofa said it wished to increase the total area for growing Arabica coffee to 100,000 hectares. In the previous years, within the Vietnam’s coffee development strategy Arabica coffee was not prioritised as Arabica is more susceptible to disease. However, disease-resistant species have been developed. A slow progress in developing Arabica coffee growing areas resulted from improper investment in restructuring plants of localities.
Clearly, in the long term, to increase value and position of Vietnamese coffee in the world market, it is necessary to take into account a balance between Robusta and Arabica coffee in a manner of accelerating the development of areas under Arabica coffee. Nhan’s comments pose an important question about how to invest in a shift in Vietnamese coffee production from Robusta to Arabica.
Phan Nam
Vietnamese
