The World Coffee Crisis: Is Vietnam to Blame?

This article puts the coffee crisis being felt so profoundly by Central America into its proper global perspective.

Gerard Greenfield

On May 24, 2001, 14 young Mexican immigrants died in the Arizona desert while attempting to enter the United States to find work. Of those, 6 were bankrupted coffee farmers from the state of Veracruz. They were among an estimated 300,000 coffee farmers in Mexico who have been forced to leave their land in search of work. These deaths—directly linked to the collapse of world coffee prices—symbolize the desperation and sense of crisis faced by small coffee farmers and coffee plantation workers throughout the region, and the world.

In Nicaragua hundreds of unemployed coffee workers and their families began a different journey – marching from Matagalpa to Managua to protest the destruction of their livelihoods and to demand government support for small farmers. Nearly 400,000 families in Matagalpa are dependent on wages paid by 44,000 coffee growers. As the price of coffee continues to decline (down 64% in two years), these families face even greater poverty.

Millions of growers failed
with a successful product

World coffee prices have fallen to their lowest level in 32 years. Before this price collapse, coffee was the world’s largest traded primary commodity after oil. An estimated 60 million people make their livelihood from coffee, and that livelihood—precarious and impoverished even in better times—Is now under threat.
In El Salvador, the drop in coffee prices, combined with the devastation caused by the January 2001 earthquake, left more than 30,000 coffee workers unemployed.

In East Timor, income from coffee production fell by 35%, affecting 40,000 families who rely directly on coffee growing for their livelihood.

In Indonesia, the selling price for a kilogram of coffee beans fell to Rp.3,000/kg, more than the cost of production at Rp.4,000/kg. In coffee-growing regions such as Lampung, Sumatra, small farmers were plunged deeper into debt.
In southern India the price of robusta fell from Rs73.03 in 1998 to Rs30.24 per kg in 2001—a drop of 58.6%. At the same time production costs rose from Rs45.98 to Rs66.75 per kg, more than double the current selling price.

In Guatemala, coffee growers are also faced with bankruptcy as selling prices continue to fall below production costs. They have started selling low-grade coffee to burn as industrial fuel in the hope that it can fetch a higher price.

The burning of coffee occurred in a different context in Chiapas. On April 17, 2001, members of the indigenous coffee cooperative Maya Vinic burned part of their coffee crop in protest at the collapse in prices.
Another instance of coffee burning took place in Vietnam a year earlier, in August 2000, when more than 150 ethnic Edeh in Dak Lak Province in the Central Highlands attacked a settlement of coffee farmers, destroyed houses and burned two hectares of coffee trees.

Despite the aggressive crackdown by the Vietnamese government, the protests escalated, and in February 2001 an estimated 4,000 ethnic Edeh and Gia Rai (Jarai) held protests in Pleiku, the capital of Gia Lai Province, while another 1,000 protested in Buon Ma Thuot, the capital of Dak Lak Province. They blockaded National Highway 14, setting up barricades on the roads 10 km outside Buon Ma Thuot. The protesters demanded the return of ancestral lands and an end to the coffee plantations that are destroying their forests. Despite the use of armed military troops and the arrest of 30 protest leaders, the protests lasted nearly two weeks. This was the most serious rural uprising since the protest by 10,000 villagers in the northern province of Thai Binh in mid-1997.

The common thread underlying the coffee burning in Chiapas and Guatemala, and protests in Nicaragua and Vietnam is the impact of the global coffee crisis on small farmers, agricultural laborers and their communities. Within this is an even greater impact on indigenous peoples and their communities, as they respond to both the failure and ‘success’ of export-oriented coffee cultivation.

Vietnam’s rise from small
producer to world champ

The bankruptcy of coffee farmers in Guatemala and Nicaragua, massive financial losses in Honduras, El Salvador, East Timor and Indonesia, and even the deaths of Mexican immigrants in the Arizona desert have all been linked to Vietnam. The oversupply of coffee in the world market and the subsequent fall in prices is blamed on Vietnam’s recent rise as a world coffee producer. The head of Vietnam’s Coffee and Cocoa Association (VICOFA), Doan Trieu Nhan, recently quoted the president of the International Coffee Organization (ICO) in an article appearing in Thanh Nien on August 12, 2001 as stating that Vietnam is "the culprit of plummeting world coffee prices."
Within a decade, Vietnam has risen from an insignificant coffee producing country to be the second largest coffee exporter in the world, and the largest producer of robusta coffee beans. In 1999, it surpassed Indonesia as the largest producer of robusta coffee and the third largest coffee producer in the world after Brazil and Columbia. By the end of the year 2000, Vietnam’s coffee production surpassed that of Columbia, making it the second largest coffee producer.

Most of this growth occurred in the last five years, with an expansion of harvested area from 155,000 hectares in 1995 to 550,000 hectares in 2001. Exports rose in this period from 4 million to 14 million hundredweight bags (accounting for 12.3% of the world’s 114 million bags). Only 4% of the coffee grown is consumed domestically, with the rest exported. Due to the limited number of coffee processing plants all of the exported coffee is unprocessed. Existing plants, such as the state-run Bien Hoa Coffee Factory and Nestlé Vietnam, are geared to the domestic market and operating well below capacity.

When the coffee tree was
known as the "dollar tree"

Coffee growing in Vietnam is concentrated in the Central Highland Provinces of Dak Lak, Lam Dong, Gia Lai and Kon Tum, where at least 470,000 hectares of land under coffee cultivation accounts for 85% of Vietnam’s total coffee harvest area. (Some estimates put the total coffee area in the Central Highlands at 514,000 hectares). Dak Lak has the largest area under cultivation, with 264,000 hectares.
These coffee plantations have their origins in the official re-settlement of nearly one million ethnic Kinh people (the majority ethnic Vietnamese) to New Economic Zones in the Central Highlands. Since these provinces border Cambodia and Laos, the Vietnamese government actively promoted the migration of ethnic Kinh to ensure national security and protect against subversion by ethnic minorities. Members of indigenous groups (such as the Edeh and Gia Rai, who rioted in February) now make up only 25% of the population of these provinces.
Even after official government re-settlement ended, a ‘free flow’ of migrants into the Central Highlands continued, largely because of the promise of wealth in growing coffee. Since 1996 an estimated 400,000 people migrated to Dak Lak to benefit from the coffee boom. More than 120,000 hectares was burned and cleared to make way for new coffee plantations. The coffee tree was now called the ‘dollar tree.’
As the ancestral forests of the indigenous people were turned into coffee plantations, many joined the rush to plant the ‘dollar tree’, while others waged a campaign to protect their land. The destruction of forests, rapid expansion of coffee cultivation and intensive irrigation practices led to soil erosion and serious water shortages. Natural rivers and estuaries ran dry and underground water levels dropped. When drought struck in 1998, 200 reservoirs dried up and underground water supplies were over-exploited. During the drought, it was estimated that 90% of families in Dak Lak did not have access to sufficient water. As water prices rose by 25%, small farming families lost over 70,000 hectares of coffee trees.

Despite the drought, coffee cultivation expanded and more and more small farmers borrowed money to plant coffee trees and buy fertilizer. Coffee traders began lending money to farmers against the future purchase of their crops—locking them into debt and mono-cropping.

Chronicle of a foretold collapse

Small-scale private farmers own an estimated 80% of coffee trees in the Central Highlands. On average, farming households own only one to two hectares. The other 20% is owned by the subsidiaries of the state-owned Vietnam National Coffee Corporation (VINA CAFE).
Coffee has been the second most important foreign exchange earner for Vietnam after rice since 1994, but in 2000, Vietnam’s coffee export earnings fell to US$458 million, an 18.8% drop compared to the previous year’s earnings of US$564 million. In the period from January to September 2001, revenue declined by 30% compared to 2000. Coffee growers in the Central Highlands lost an estimated US$172 million from the 2000-2001 crop.
In early 2001, temporary price rises encouraged small farmers to continue growing coffee despite signs of a long-term collapse in coffee prices. In January 2001, the per kilogram price of coffee rose by VND1,000 in Lam Dong and Dak Lak, but another price drop followed only three weeks later. In mid-February prices fell each day for 5 consecutive days. In response, coffee farmers started burning their trees. In Dak Lak alone, over 10,000 hectares of coffee was cut down, burned or abandoned.
At the same time, official plans were announced to reduce total coffee output and raise prices by cutting down 150,000 to 180,000 hectares of coffee trees, including 70,000 hectares in Dak Lak and 40,000 hectares in Lam Dong, according to the same Thanh Nien article.

The collapse of ACPC

The Vietnamese government’s plans to destroy up to 180,000 hectares of coffee trees follows a series of failed attempts to reduce output and restore world prices.
On May 19, 2000, the Association of Coffee Producing Countries (ACPC) passed a resolution requiring its members to retain the equivalent of 20% of export volume. Created in 1993 under Brazil’s leadership, the ACPC comprised 14 member-states, and was designed to regulate world coffee prices in the same way that OPEC regulates oil prices. Significantly, Vietnam was not an ACPC member.

The retention scheme launched by the ACPC in May 2000 was intended to reduce oversupply in the world market and raise coffee prices. Although not a member of the ACPC, the Vietnamese government announced plans to support the proposal and retain 20% of export volume, or 150,000 tons. It bought and stockpiled 60,000 tons at the end of 2000, then another 90,000 tons in early 2001, but released most of the stockpile within six months, causing a further drop in prices.

Sudden see-sawing in search
of an "acceptable" poverty

When the retention plans failed and global oversupply reached more than 10%, the ACPC passed a resolution on September 27, 2001, suspending the retention plan effective October 1. The ACPC then ceased operations.

Following this failure, new regional arrangements were sought, especially by Indonesia. In early December 2001, the Association of Indonesian Coffee Exporters (AEKI) announced that the world’s three largest producers of robusta coffee—Indonesia, Vietnam and India—would meet in Hanoi in January 2002 to discuss joint action to limit exports and raise coffee prices.
Despite these attempts to establish a post-ACPC bloc of robusta producers to regulate prices, Indonesian coffee exporters played a role in the recent price collapse. In the 2000-2001 season, Indonesian exporters imported 500,000 bags of green coffee beans from Vietnam for re-export.
Of this amount, 200,000 bags were supplied to the domestic roasting industry then exported, while the other 300,000 bags were re-exported unprocessed. In April 2001, Indonesian coffee exporters again started importing cheaper green coffee beans from Vietnam in order to meet new orders for dried and roasted coffee.

Global-Local Linkages

While Vietnam’s failure to reduce export levels contributed to the ACPC’s collapse, there is a more important political and economic global-local dynamic involved. This dynamic is based on several factors, including:
1. The impact of international financial markets
2.The role of the transnational corporations (TNCs) that dominate the global coffee industry
3. The power of the ‘Agro-Export’ model
1. The impact of international financial markets. The basic price of coffee is set by traders on the New York Coffee, Sugar and Cocoa Exchange Inc. and the London International Futures Exchange. These prices directly and immediately affect local traders and growers. For example, on October 9, 2001, the price of robusta on the London International Futures Exchange fell to its lowest level in 30 years. On the very same day the price of coffee beans in Dak Lak fell to VND4,000/kg—half the production cost of VND8,000/kg. In one sense, the speed of this reaction and its direct impact on local prices reflects the impact of new technologies. On the other hand, the power of traders on the coffee exchanges and the hyper-exploitation of small growers through their speculative transactions is nothing new, and is consistent with the world coffee industry’s colonial past.

The point is that as long as prices are determined on the London and New York exchanges by powerful economic interests in Europe and North America, the ACPC could not effectively manage prices and protect its members. In fact, the ACPC was only created in 1993 because of the collapse of the International Coffee Agreement four years earlier. In its drive to impose the ‘free market’ on the rest of the world, the US government strongly opposed the regulation of world coffee prices through the Agreement, forcing its collapse in 1989. It was only after this that low-cost producers such as Vietnam entered the market and undercut prices.

2. The role of the TNCs that dominate the global coffee industry. Despite the crisis—or more accurately, because of it—the four transnational corporations (TNCs) that dominate the global coffee industry continue to profit. Proctor & Gamble (which owns Folgers), Philip Morris (whose subsidiary Kraft Foods owns Maxwell House), Sara Lee (Hills Bros., MJB) and Nestlé dominate the world coffee market. As Nestlé’s annual report on its coffee-trading performance in 2000 states: "trading profits increased...and margins improved thanks to favorable commodity prices." (Quoted in Oxfam, Bitter Coffee: How the Poor are Paying for the Slump in Coffee Prices, May 16, 2001).

Not only do these TNCs profit from the crisis faced by coffee growers and workers, but their manipulation of prices and world coffee demand contributed to the current crisis. In the 1980s and early 1990s, fierce competition between TNCs for market share saw an emphasis on price rather than quality, encouraging the use of lower-grade robustas, especially in canned coffees. This led to the rapid expansion of lower-grade robusta coffee.

The devaluation of the Vietnamese dong in 1997 was quickly exploited by coffee traders and retailers. TNCs such as Nestlé started sourcing from Vietnam to drive down prices, forcing its traditional suppliers in Mexico and Central America to lower their prices. However, even Vietnam did not benefit from this shift. Despite raising production levels to meet an expected demand of 55,000 tons of robusta for instant coffee in the 1998-99 season, Nestlé purchased only 4,500 tons from Vietnam. Similar price manipulation was demonstrated by Nestlé’s recent pressure on the Mexican government. In January 2001, the Mexican government gave Nestlé a license to import 600,000 bags of coffee from Vietnam. This led to a drop in local prices before any coffee was even imported.
Nestlé is now financing new research and development (R&D) programs in coffee production in Vietnam’s neighbor, Thailand. It has already identified 7 out of 20 coffee strains it plans to promote for widespread, export-oriented coffee production. Similar R&D is currently being financed by the World Bank in another of Vietnam’s neighbors—Laos.

The expansion of genetically modified (GM) coffee beans by TNCs threatens to further reduce coffee prices and undermine the livelihood of the small farmers. The advance of GM coffee will facilitate increased concentration of coffee growing in agro-industrial plantations and TNC-based contract growing.

While the impact of TNCs has been extensive, it is important to recognize two other important factors:
First, Vietnamese companies played a direct role in driving up coffee production. State-owned corporations, in particular VINA CAFE and its subsidiaries, encouraged local speculation in coffee. VINA CAFE built close ties to overseas trading companies and retailers and acted as a conduit for their exploitation of Vietnamese coffee farmers. State commercial banks also saw greater returns on coffee and geared lending to local farmers in this direction. Another driving interest behind coffee cultivation was the sale of fertilizer—both by state-owned corporations searching for a new internal market of intensive fertilizer consumption and state trading companies profiting from the import of fertilizers (especially from countries such as Indonesia).

Second, regional TNCs within Asia have played a critical role. VINA CAFE’s closest ties are with Japanese trading companies such as Itochu and Mitsui. The over-expansion of robusta was in part due to rising demand for low-grade beans use in canned coffee. Much of this trade was conducted via Singapore.

Another significant regional TNC is the Singapore-based corporation, Olam International, a global trading house that deals in agricultural commodities including coffee, cashew nuts and cotton, and is one of the world’s largest shippers of robusta coffee. In fact, in 1995 and 1996, Vietnam’s coffee exports to Singapore were double its exports to the US, and in 1997 Singapore still ranked higher as an export destination than Switzerland and the US.

More recently, Olam established a US$1.7 million joint venture, Olam Viet Nam Ltd., in Vietnam. This involves the opening of two new coffee-processing factories in Lam Dong Province’s Di Linh District and Dac Lac Province’s Dac Nong District. The Di Linh factory has a processing capacity of 15,000-18,000 tons per year, while the Dac Nong factory will have an initial annual capacity of 8,000 tons. The opening of these factories not only takes advantage of lower costs in Vietnam but also encourages small farmers in the area to continue producing coffee.

3. The power of the ‘Agro-Export’ model. Although a number of NGOs, ‘fair trade coffee’ campaigners and journalists have blamed World Bank policies for Vietnam’s over-production of coffee, there is not much evidence to support this claim. There was minimal direct Bank lending to the coffee industry in Vietnam. Indirect loans may have played a role, but the Vietnamese Bank of Agriculture and state commercial banks made the decisions on actual financing. More importantly, the timing of Vietnam’s coffee boom does not match the increase in World Bank activity in Vietnam. Given that coffee trees take four to five years to mature, the extensive planting that led to an explosion of coffee output would have taken place in 1990-91. The bulk of World Bank lending and its imposition of ‘free market’ policies did not begin until after the US embargo was lifted in 1995. In fact, bilateral loans and ‘aid’—particularly from Western European countries and Japan—have played a more significant role in financing Vietnam’s coffee expansion. (Even at the height of the crisis, the France Development Fund announced a US$40 million loan to Vietnam in 1998 to create 40,000 hectares of arabica coffee. Although this was presented as an ‘alternative’ to robusta coffee, the emphasis was still on export-oriented expansion of coffee plantations. The recent decline in arabica prices means that farmers who borrowed under this fund at a rate of VND15 million per hectare face financial difficulty even before the trees can be harvested.)

What this suggests is a common weakness in the analysis of globalization among some NGOs, social movement organizations and trade unions. The search for direct institutional links between the World Bank/IMF/WTO and domestic economic policies often leads to the neglect of more powerful structural and ideological influences. Since 1989, the Vietnamese government has embraced key elements of neoliberal ideology—imposing far-reaching deregulation and privatization programs and enforcing the commercialization and export-oriented expansion of agriculture.

In February 2000, the Government recognized the existence of capitalist production in agriculture and endorsed its expansion. Labeled the "farm economy," this type of production is based on the private accumulation of land and hiring waged labor. Under the new resolution on the farm economy, farm owners can hire an unlimited number of workers and determine their wages. In addition, they may use their land to mortgage loans from state commercial banks.

It is in the context of the commercialization of agriculture, export-oriented expansion and the rise of the farm economy that the World Bank plays an important role—not in terms of direct loans, but in shaping and reinforcing a dominant neoliberal development ideology. This is further reinforced by the conditions imposed on Vietnam by the US government under the new Vietnam-US bilateral trade agreement and the painful process of gaining accession to the WTO.

Structural pressures are equally important. By structural pressures we mean the social, political and economic conditions that force governments to adopt export-oriented development strategies and lock them into a specific "development model." A key influence is the pressure of external debt repayment.

Driven by debt

One of the reasons that the collapse in coffee prices has been so devastating for so many countries in the South is that coffee exports are a crucial source of foreign currency needed to service their external debt. The pressure of debt repayment is a driving force behind exports, locking these countries into the free trade and investment regime of the WTO and the structural adjustment policies of the World Bank and IMF. Failure to meet debt repayment deadlines merely places the governments of these countries under greater control by the transnational banks and the IMF.

The pressure of debt also locks in small farmers. Loans made under contract-growing arrangements promote dependence on a single cash crop (mono-cropping) and are tied to meeting quotas. The risk of defaulting means the loss of land. In April 2001, the Bourban-Gia Lai sugarcane processing joint venture prepared a lawsuit against 267 farming households in Agun Pa, Gia Lai Province, for defaulting on loans to grow sugarcane (Lao Dong, April 30, 2001). Coffee traders have already threatened coffee farmers in the province with similar lawsuits.
In October the State Bank of Vietnam ordered that coffee growers be given a moratorium of three years to repay loans. Nonetheless, this only applies to formal loans from state commercial banks. Many coffee farmers are indebted to private lenders and traders who charge high interest rates and seek repayment in the form of land or coffee.

Ultimately farmers are prevented from diversifying their crops and are locked into loans geared to production for export. This is especially serious for coffee growers because of the long period it takes for coffee trees to reach harvesting age. Ironically, even as coffee prices collapse, coffee growers are forced to intensify the use of fertilizers and raise production to try to meet debt repayments. The result is usually bankruptcy. According to a report by Vietnam Economic News (January 29, 2001), falling agricultural export prices coincide with rising costs of fertilizer. (The report also shows that only 9% of 12 million farm households live in permanent brick houses. Nearly 3.5 million have no access to electricity, and between 3 to 4 million do not have access to clean drinking water.)

In Dak Lak coffee farmers who burned their coffee trees are desperately trying to find another agro-export crop to earn enough to repay their debts. But the low price of other commodities—including rice and black pepper—has made this difficult. The only commodity not suffering a decline is fresh fruit and vegetables.

The sense of desperation faced by small farmers threatened with debt and bankruptcy, like the desperation that drove coffee growers from Veracruz into the Arizona desert, is very clear. As a local coffee trader in Dak Lak Province observed: "Farmers are selling everything they can to repay bank debts. Anything of value in their house—all goes for sale to please the debt collectors." (Quoted in Clare Black, "Hunger, disease grip coffee areas after price dive," Reuters, October 26, 2001.

Gerard Greenfield is the coordinator of the Social Action Workshop for Alternatives in Asia. This article was, prepared for the IUF Land & Freedom Asia and Pacific Regional Conference, Bandung, December 10-12, 2001.

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