Results Todd A. Crawford Principal Economist The Conference Board - PowerPoint PPT Presentation

Coffee Sector Analysis and Results Todd A. Crawford Principal Economist The Conference Board of Canada Jakarta, Indonesia Partner: Project Executed by:

Presentation Overview 1) State of Coffee Production in Indonesia • Overview of Production • Drivers of Production Growth • Relevance of Coffee to Indonesia’s Exports • Global Context 2) Indonesia’s Coffee Supply Chain • From Seed to Cup • Summary of Value-Added • Cross-Country Comparisons 3) Key Findings • Uniqueness of Coffee in GVC Analysis • Key Barriers to Expanding Value • The Future of Coffee

Characteristics of Indonesian Coffee Production • Primarily Robusta coffee (86% of total coffee production) • Highly fragmented sector (over 90% of coffee grown my smallholders) • Concentrated in Sumatra (69% of Indonesia’s total coffee production)

Arabia Production Expanding Quickly, but Robust still Dominates coffee production, millions of 60kg bags Robusta Arabica 14 12 10 8 6 4 2 0 Sources: U.S. Department of Agriculture.

Higher Coffee Production Has Increasingly Been Satiated by Rising Domestic Demand millions of 60 kg bags Domestic consumption Exports 12 10 8 6 4 2 0 Sources: International Coffee Organization.

Expanding Middle Class Supporting Rising Per-Capita Coffee Consumption average annual growth, 2000-16, per cent Domestic coffee consumption (total) Domestic coffee consumption (per- capita) Population 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Sources: International Coffee Organization; Population Reference Bureau.

Coffee Not Keeping Pace with Overall Agri-Food Export Growth average annual export growth, 2000-2015, per cent Total agri-food Coffee Total merchandise 6.0 8.0 10.0 12.0 14.0 Sources: UN Comtrade Database.

Indonesia's Agri-Food Exports Centered Around Palm Oil trade value of agri-food exports from Indonesia, 2015, $US millions 35 Other 30 Tobacco 25 Coffee 20 15 Cocoa and cocoa preparations 10 Fish and crustaceans 5 Palm Oil 0 2005 2010 2015 Sources: UN Comtrade Database.

Coffee Exports Moving into New Markets destination for Indonesian coffee exports by country, per cent 100 Other 80 60 Italy, Malaysia, Russia, Thailand 40 20 USA, Japan, Germany 0 2005 2015 Sources: UN Comtrade.

Indonesia Is a Key Robusta Producer Arabica and Robusta production by country, 2016, millions of 60kg bags Brazil Arabica Colombia Ethiopia Honduras Vietnam Indonesia Robusta India Other 0 20 40 60 80 100 Sources: U.S. Department of Agriculture.

Indonesia Outperforming Main Competitors coffee production, compound annual growth rate, 2006-2016 Indonesia Vietnam Brazil Colombia Ethiopia World All other producers * -1.0 0.0 1.0 2.0 3.0 Source: International Coffee Organization. .

Limited Production Surplus Restricts Export Capacity production and consumption of coffee by country, 2016, kg per capita Per-capita production Per-capita consumption 20 15 10 5 0 Colombia Vietnam Brazil Ethiopia Indonesia Sources: International Coffee Organization; Population Reference Bureau.. .

Presentation Overview 1) State of Coffee Production in Indonesia • Overview of Production • Drivers of Production Growth • Relevance of Coffee to Indonesia’s Exports • Global Context 2) Indonesia’s Coffee Supply Chain • From Seed to Cup • Summary of Value-Added • Cross-Country Comparisons 3) Key Findings • Uniqueness of Coffee in GVC Analysis • Key Barriers to Expanding Value • The Future of Coffee

Coffee Production Process Other Food Consumption & Coffee Plants Products Domestic Inventories Consumption Land, Buildings & Agricultural Energy Services Fertilizer & Coffee Raw Coffee Exports Pesticides Processing Other business Transportation services Other industrial use Chemicals Exports Land & Energy

Fertilizer and Pesticide Usage share of total material inputs, per cent 70 60 50 40 30 20 10 0 Colombia Indonesia India* *only includes pesticides Sources: National I-O tables.

Indonesia Captures Large Share of the Value their Agricultural Exports Domestic Value-Added in Agri-Food Exports India Indonesia Colombia Brazil Vietnam 75 80 85 90 95 100 Sources: TiVA Database, OECD.

Visualizing Higher Fertilizer Use Scenario 1 (Current) Scenario 2 (Potential) Domestic Content Domestic Content Foreign Content Foreign Content 0.6 2.8 9.4 17.2

Presentation Overview 1) State of Coffee Production in Indonesia • Overview of Production • Drivers of Production Growth • Relevance of Coffee to Indonesia’s Exports • Global Context 2) Indonesia’s Coffee Supply Chain • From Seed to Cup • Summary of Value-Added • Cross-Country Comparisons 3) Key Findings • Uniqueness of Coffee in GVC Analysis • Key Barriers to Expanding Value • The Future of Coffee

Uniqueness of Coffee in GVC Framework • Generally coffee is processed close to where it is consumed (this can limit moving higher up smile curve). • Less of an emphasis on moving up value chain, more of an emphasis on expanding value (at least for now).

Key Barriers to Expanding Value • Stagnant Farm Productivity • Supply Chain Inefficiencies • Quality Control Issues

Farm Yields Flat Over Past Decade right axis: average coffee yield, kg/hectare; left axis: index of coffee yields, 2006=100 Average coffee yield (right) Smallholder Estates 130 600 120 580 110 560 100 540 90 520 80 500 2006 07 08 09 10 11 12 13 14 15* *preliminary figures. Source: Statistics Indonesia.

Factors Limiting Growth in Farm Productivity • Modern agricultural practices not widespread: ▪ Pruning and weeding ▪ Erosion control ▪ Coffee nutrition (e.g. limited use of fertilizers) ▪ Composting ▪ Shade management ▪ Pest and disease control • Deficiency of training to accompany material inputs provided to farmers by government. • Limited investments into replacing ageing coffee plants.

Slack in Supply Chain • High number of middlemen impede timely movement of coffee to market. (At times, this results in quality deterioration to such an extent that coffee is rejected for export markets.) • Geography puts Indonesia at a disadvantage in transporting goods efficiently. • Poor quality of infrastructure represents another impediment to efficient transportation.

OECD Index of Comparative Quality of Infrastructure 100 80 60 Indonesia Thailand 40 India China 20 Malaysia 0 Quality Quality Quality Quality of overall of roads of railroad of port infrastructure infrastructure infrastructure

Challenges Surrounding Quality Control • Weakens reputation of Indonesian coffee (hurts customer base and impacts sales potential). • Limited awareness of increasingly stringent international food safety regulations/standards. • Promoting more widespread certification of coffee would help to promote higher standards.

The Future of Coffee • Coffee demand continues to outstrip supply. • Demand driven by rising consumption in non-traditional markets. • Supply constrained by volatility in growing conditions caused by climate change. • Specialty coffee continues to grow in prominence.

Key Takeaways • Indonesia has a comparative advantage in coffee production. • Vital activities that will allow Indonesia to expand its value along global coffee supply chain include: • Process upgrading (improve farmer productivity) • Product upgrading (expansion into higher-value coffee offerings) • Growth in post-production activities (e.g. marketing) driven by expansion in domestic market. • Supporting vertical integration of stakeholders will help to reduce supply chain inefficiencies, bolster functional upgrading.