George Scott, Private Sector Specialist for the UN Environment Office in Asia and the Pacific, discusses the issues faced by the coffee sector in Viet Nam and how the transition to sustainable practices can provide some of the solutions required.
Viet Nam is the world’s second largest exporter of coffee after Brazil and the largest exporter of Robusta coffee in Asia. Coffee is the second most important agricultural commodity in the Southeast Asian country, after rice, contributing USD 3 billion to the Vietnamese economy, or roughly two to four percent of its GDP. It also accounts for around 40 percent of global Robusta production and nearly 60 percent of global Robusta exports.
Around 90 percent of Viet Nam’s coffee production comes from the Central Highlands- the agricultural hub of the country. In recent years, coffee has demonstrated its potential to generate high revenues, rendering the crop very attractive for smallholder cultivation. As a result, since the 1980s, coffee production in Viet Nam has increased significantly from 19,400 tonnes/year to 1.76 million tonnes in 2016. This is the result of both increasing land area under cultivation and intensifying farming practices. For reference, Vietnamese farmers typically reach yields of more than 3.5 tonnes per hectare, compared to 0.8 tonnes per hectare in Thailand, 0.5 tonnes per hectare in Indonesia, and only 0.4 tonnes per hectare in Lao PDR.
While this growth has made a significant contribution to the Vietnamese economy, it has not come without cost. In fact, maintaining such high levels of productivity has generated a series of environmental challenges, including deforestation and ecosystem degradation, which may threaten the future viability of Robusta production in Viet Nam. In addition, climate change is expected to exacerbate these issues by significantly reducing the land area suitable for coffee cultivation, as well as reducing the water available for irrigation needs.
Further compounding these issues is the fluctuation in the global market price of coffee, which results from the cyclic nature of global coffee production. When prices are high, smallholder farmers are more attracted to cultivation, which increases the market supply. Since there is a lag in the response, the market tends to overcorrect, leading to over-supply, which subsequently drives down prices.
This is important to note because firstly, it directly impacts the gross margin of producers, affecting their livelihoods. This, in turn, can incentivise smallholders to encroach on forest, either to take advantage of the higher prices, or for poorer farmers with a higher time preference, when prices are depressed, to reinforce their livelihoods. Secondly, when the price is low, there is limited economic rationale for actors in the supply chain to implement sustainability projects.
Mono-cropping cultivation, typical in the Central Highlands, increases the impact of fluctuations in the price of coffee. This is further exacerbated by relatively small domestic consumption and limited exposure to an international market that is clustered around the production from a small group of countries. Together, Viet Nam, Brazil, and Indonesia, account for almost three-quarters of global Robusta production.
The combined impact of a government-sponsored coffee rejuvenation programme in the region and favourable growing conditions from the other coffee producing countries have led to fears that continued growth in supply could supress the coffee price to a point that farmers would no longer be able to ensure a sufficient standard of living, driving coffee producers away from coffee production.
Scaling up solutions
However, solutions do exist that can help improve the environmental resilience and economic stability for smallholder farmers, as well as to ensure the supply of coffee from the region. In fact, in anticipation of the impact that the declining price of Robusta may have on the livelihoods of Robusta farmers in the Central Highlands, many international traders and coffee companies have already begun to promote intercropping models. Among them include Louis Dreyfus, ACOM (which promotes intercropping of avocado and cassia siamea alongside coffee) and Thang Loi (which promotes intercropping of cassia siamea and pepper alongside coffee).
The use of “intercropping” (combining multiple crops on one plot) can diversify incomes and reduce the impact of coffee price fluctuation. Intercropping has the added benefit of providing shade for the soil and for the coffee plants, which allows the coffee beans to mature more slowly, increasing their quality and as a result, price.
In Viet Nam, there is also an increasing trend of Climate Smart Agriculture (CSA). CSA practices include smart water and irrigation management; adoption of improved crop varieties; agroforestry; intercropping; sustainable land management; agricultural waste treatment, such as integration of biogas technologies in livestock production; and improved agro-climate information services. Yet the majority of CSA technologies have a low to medium adoption rate due to low availability of required inputs, high costs of installation, and financial constraints and limited access to tailored information and guidance.
Financing sustainability improvements
For smallholders, converting to intercropping and other climate-resilient models can provide economic benefits when compared to mono-cropping models. The diversified revenue also provides a buffer to volatility in the global Robusta market, which only stands to increase as the impacts of climate change intensify.
However, the conversion to alternative production models requires a substantial capital investment at the onset, which is followed by a period of limited revenue between replantation and first production. This makes the conversion financially challenging for poorer households, which lack access to additional financing.
Banks in Viet Nam commonly face the shortage of mid and long-term capital sources for mid and long-term credit. One critical challenge is therefore finding sufficient sources of low-cost capital that can be used to provide loans to smallholders of sufficient tenor to finance their conversion to sustainable cultivation. To fill these gaps in financial capacity, the Vietnamese government calls on the international community and the private sector to provide support. This requires investigating new financing models that can de-risk and incentivize investment in novel modes of coffee production.
To this end, UN Environment, as part of a consortium of partner organisations including UNDP, CIAT, IDH and EFI, is working to establish a zero-deforestation jurisdiction for commodity cultivation in four districts of the Central Highlands. This includes fostering partnerships with agricultural solution providers, agribusinesses, as well as public and private financial actors to develop financial systems that can channel the investment capital required for the conversion to more resilient agricultural production models, with the view towards greening Viet Nam’s coffee supply chain one bean at a time, rendering that espresso all the sweeter and more sustainable for coffee drinkers worldwide.