Final Thesis Defence-Rishi

11

Supervisors:

Prof. Dr. Ulrike GroteProf. Dr. Dieter M. HörmannProf. Dr. Bernhard Hau

THE IMPACT OF COFFEE THE IMPACT OF COFFEE PRODUCTION ON NEPALI PRODUCTION ON NEPALI SMALLHOLDERS IN THE SMALLHOLDERS IN THE

VALUE CHAINVALUE CHAIN

byby

Rishi Ram KattelRishi Ram Kattel

Final Thesis Defence24th Sep. 2009IUW

Financial support by DAAD is acknowledged.

Outline

Problem Statement

Review of Literature

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

33

The Facts of Nepali Coffee

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

• The agricultural sector is the backbone of Nepalese economy

38% share GDP 2.8% annual growth rate, 66% labor force (employment).

• Coffee share: 7.3% share in country‘s total 15% agricultural export share.

• Annual growth rate: 35% coffee production and 25% production area.

• Coffee production: in 33 districts out of 75 (altitude: 600 – 1600 m)

• High quality specialty coffee

Key market players in Nepal:

Coffee Farmers 12,800

Pulper operators 200

Processors /Marketers 9

Exporters 4

Coffee farming on thefoothills of the

Himalaya.

Photo: Field survey, 2008.

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWComparision of Nepali Coffee Sales, 2004 to 2007

114

40

6766

80

37

34 37

0

20

40

60

80

100

120

2004 2005 2006

Fiscal Years

Gre

en B

ean

s in

Met

ric

To

n

InternationalMarket

DomesticMarket

2007

Development of Nepali Coffee Sales, 2004 to 2007

Total Green Beans Marketed: 181 MT (in 2007).

1. International Market: 63%; Japan (55%), Europe (34%), USA (3%) & other countries (8%)

2. Domestic Market: 37% (Source: CoPP/Helvetas, 2007 )

55

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWMajor Problems in Nepali Coffee Sector

• Lack of Research: to analyse the impact of ‘Group Organic Certification’ on the livelihood strategies of Nepali smallholder coffee producers in the value chain.

• Lack of marketing strategies.

• Low economies of scale in production

• Nepali coffee sub-sector underdeveloping in the value chain: quality? value chain upgrading?

Need to identify and recommend upgrading strategies.

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

Types of upgrading at producers’ level:1. Product upgrading: improving the product quality. 2. Process upgrading: improvement of process efficiency (e.g. wet processing at farm)

3. Function upgrading: new process form e.g. roasting of coffee

4. Chain upgrading: adding a new value in chain, investing product diversification with fruits (coffee with cocoa or fruit crops as shade trees) or possibilities of changing

buyers in the value chain system. ( Source: Humphrey & Schmitz, 2000)

Literature Review: Value Chain

TechnologyProduction Process

Upgrading means that individuals, firms or even a whole country improves its original situation through

“Changes in the nature and mix of activities, both within each linkage in the chain, and in the

distribution of intra-chain activities” (Kaplinsky & Morris, 2001, p.38).

Input Supply

Production Processing Marketing Consumption

Component of general value chain.

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

Past Empirical Research Findings

The specialty coffee segment has been growing at an annual rate of 5-10% in the world market (Lewin et al., 2004).

Cooperatives play an important role in enabling farmers to access specialized markets (Blackman et al., 2005).

Strong coordination between development organizations and coffee producers‘ cooperatives have increased smallholders status (Fromm & Dubon, 2006; Honduras).

Farmers’ access to relevant information and marketing assistance is expected to have a positive influence on marketing performance (Poole, 2000).

Entry barrier in coffee marketing: “low quality” and “low level of product and process efficiencies” (Oxfarm, 2005; Calo & Wise, 2005).

Consistence quality of the coffee is most important factors to be competitive in markets (Lewin et al., 2004).

88

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWMajor objective:Major objective: To examine the impact of coffee production on To examine the impact of coffee production on

Nepali smallholdersNepali smallholders’’ livelihoods taking their livelihoods taking their integration into value chain into account. integration into value chain into account.

The specific objectives are:

1. To assess the differences between certified and non-certified Nepali coffee farmers.

2. To understand the function of the Nepali coffee value chain and investigate whether certification scheme offers additional benefits to the smallholder coffee producers.

3. To assess major entry barriers of Nepali coffee in the international market.

4. To identify the determinants which lead farmers‘ decision to adopt process upgrading at farm and to investigate whether this decision provides higher annual household income from coffee sector.

99

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

Coffee Producers

Chain Performance:Type of contractMarketing conditionCoffee quality

Marketing Chains

Domestic Market

International Market

Production SystemEfficiency: Input & Output

Organizations

With Certification

Without Certification

By whom ?? By whom ??

Conceptual Framework. Source: Own illustration

Capital

Study Area

1010

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWGulmi DistrictCertified: 60 HHs

Marketing: Cooperative

Kavre DistrictNon-certified: 60 HHsMarketing: Company

Major coffee growing districtsOther coffee growing districts

1111

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

Survey Method: Purposive selection of districts and villages and random sampling of smallholder coffee farmers.

Survey Techniques:

1. Coffee producers’ survey: Semi-structured interviews with 120 HHs ( i.e. 60 in each district).

3 villages were selected in each district according to the criteria: (a) altitudes (<850 m, 1000-850 m & > 1000 m) (b) smallholders: All are small-scale coffee producers (< 1 ha)

2. Focus group discussions: total 6 (8-10 smallholder coffee producers per group).

3. Expert interviews with: a cooperative in Gulmi, 2 District Coffee Producers’ Associations, 3 traders.

Methods of Data Analysis: Descriptive statistics, LOGIT and OLS regressions.

Research Methodology

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW Descriptive & Comparative Statistics:

*** significant at 1%; **significant at 5%; *significant at 1% levels. 1 US $ = Rs. 71.06

Variables Total Average (N=120)

Certified (n=60)

Non-certified (n=60)

t-test,X2 -test

Continuous: Mean SD Mean Mean t-value

Education (years) 6.3 4.64 7.3 5.2 2.674***

Experience of coffee cultivation (years) 9.2 5.85 9.8 8.6 1.139

Adult HH members (number) 4.4 2.02 4.6 4.1 1.355

% of shade trees cover 57.2 29.88 50.7 63.8 -2.457**

Yield of coffee in 2007 (qq/ha) 24.5 22.91 20.7 27.8 -1.844*

Income from coffee (Rs.) 6,056 9,111 6,140 5,966 0.103

Dummy: % % % X2 -value

Gender (male =1) 58 52 65 2.194

Altitude (>1000 m =1) 28 27 30 0.164

Wet process upgrading (yes=1) 33 25 40 3.077*

Training received (yes=1) 64 70 58 1.331

Membership (yes=1) 24 33 15 5.502**

Book keeping (yes = 1) 31 43 18 8.792***

Access to credit (yes=1) 42 38 45 1.739

Trust (yes=1) 38 45 32 2.256

Shocks (yes=1) 47 72 22 30.134***

Poor (< US $ 1.25 =1) 34 40 28 1.815

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

***significant at 1%; **significant at 5% level; *significant at 10% level. Here, 1 US $ = Rs. 71.06Different letters a, b indicate significant difference of mean ( ).

05.0

Variables (N=120) Low alt. Medium alt. High alt. F-test

Yield (qq/ha) 20.4 b 20.9 b 32.8 a 4.502**

Income from coffee (Rs.) 4,605 b 4,876 b 9,206 a 2.972*

(32.2) a

(20.2) b

(23.3) ab

(11.4) b (13.3) b

(33.2) a

F: 8.923*** F: 2.480*

( ) : mean

F : F-test

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

Certified Farmers

Cooperative(Certified)

PulperOperators

Companies (Conventional)

Domestic Market

Input Suppliers

Non-certified Farmers

International Market

90%Wet processed Green

Beans (GB) only30% wet processed GB70% unwashed GB/RB

65%

45%Dry Cherry (90%)

Dry Parchment (10%)

Dry Parchment(20%)

Filter Coffee(2%)

Nepali Coffee Value Chain: Two Districts Investigate

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWOrganic Certification

What are the major benefits from certified organic coffee production?

• Price premium ?• Other benefits?

Price premium

Price (2007/008) Certified Non-certified

t-test

Fresh Cherry (Rs./kg) 30 ($ 0.42)

25.08 ($0.35) 11.195***

Dry Parchment (Rs./kg)(CR 4:1) 160 ($

2.25)151.19 ($2.13)

5.817***

Dry Cherry (Rs./kg)(CR 3:1) 60 ($ 0.84) Not sales

Ground Coffee (US$ /kg)(CR 7.5:1)

300 ($ 4.22) 300 ($ 4.22)

No premium(domestic market)

Green Beans (US$/kg)(CR 6.6:1) 640 ($ 6-12) 426 ($ 4-8 )

Premium for cooperative (export)

Price Premium:20% in per kg FC

& 6% in per kg DP

Farm gate

***significant at 1% levelNote: CR: Conversion Ratio of Fresh Cherry to processed form. FC for Fresh Cherry Coffee and DP for Dry Parchment US $ 1 = Nepalese Rs. 71.08 (in 2007/008)

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWOther benefits from

certification

Benefits due to: Index % Rank

Price security 3.36 38.4 I

Easy to sell/market guarantee 2.79 19.7 II

Environmental benefits 2.76 19.4 III

High price per unit 2.07 14.6 IV

Better coffee quality 1.64 5.6 V

Diversified income sources 0.90 2.2 VI

*n = 47Note: Benefits from certification. (The scale values considered: 4 for very high and 1 for very low)

Source: Questionnaire results-from ranking matrix and importance of index (from certified respondents)

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW Findings from Expert Interviews & SWOT Analysis

Export requirements:1. Variety: Identification is necessary2. Supply continuation of high quantity3. Quality consistency4. Specialty coffee

Major entry barriers to export: Marketing Chains:

Certified Non-certified

1. Consistency in quality High High

2. Quantity supply High High

3. Relationship with buyer Medium Medium

4. Certification of origin Low High

5. Initial qualification (related to product & process upgrading)

High - Medium Medium

Thus, quality inconsistency and low quantity supply are major barriers to entry for both chains in the international market.Note: Degree of barrier to entry: High, Medium and Low to the exports.

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW1. Logit model (to determine the farmers‘ decision to adopt process

upgrading)

i

n

iiii

i

ii xZ

P

PInL

1

.1

Yi =1; P (Yi = 1) = Pi

Yi =0; P (Yi = 0) = 1-

Pi

Pi = E (Y = 1/x) iixfYi = f (Gender, Education, Adult, Poor, Production, Training, Trust, Credit, Book, Certified) ---------Equation (1)

i

COFFEE

CertifiedShockYieldShade

AltitudeServiceMemberocess

AdultExperienceAgeInY

....

...Pr.

...1

111098

7655

32

--------- Equation (2)

COFFEEInY

Yi (PROCESS upgrading at farm) = a dichotomous dependent variable (1 if farmer sells dry parchment after wet processing, 0 otherwise)

= Annual HH income from coffee sector in 2007 (In Natural log form)

Source: Gujarati, 2003

2. OLS regression (for determinants of annual HH income from coffee sector)

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWLogit regression results: [farmers’ decision to adopt process upgrading, Yi =1]

Variables ( N= 120) Coefficients Robust S.E dy/dx #

Gender (male = 1)) 0.451 0.719 0.079

Education (years) 0.110* 0.060 0.019*

Adult (number) 0.094 0.183 0.016

Production (qq) 0.162 0.141 0.029

Book keeping (yes = 1) 1.759** 0.878 0.356**

Credit (yes = 1) 1.421** 0.587 0.266**

Trust (yes = 1) 2.119*** 0.627 0.410***

Training (yes = 1) 1.196** 0.636 0.194**

Poor (< US $ 1.25/d/p = 1) -0.441 0.653 0.076

Certified (yes = 1) -2.466*** 0.716 0.429***Constant -4.239*** 1.151 -Log likelihood = - 44.27 Wald test (10) = 42.02*** (Prob > Chi2=0.000) Pseudo R2 = 0.41

Goodness-of fit test = Pearson Ch2 (109) = 88.19; Prob > Chi2 =0.9286Area under the ROC curve = 0.8990Overall corrected prediction = 82.05%

*** significant at P = 0.001; ** significant at P = 0.05; * significant at P = 0.10. Model : Logit Regression. # Marginal change of probability (after logit).

2020

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW OLS Regression estimates: [for determinants of annual household income from coffee (in natural log)]

Variables ( N= 117) Coefficients S.E t-value

(Constant) 5.991*** 0.458 13.06

Age (years) 0.002 0.006 0.42

Experience (years) 0.059*** 0.014 4.14

Adult (number) 0.020 0.040 0.51

Process upgrading (yes=1) 0.622*** 0.186 3.34

Member (yes=1) 0.499** 0.197 2.54

Service (yes=1) 0.161 0.228 0.71

Altitude (>1000m =1) 0.494** 0.191 2.58

Shade cover (%) 0.010*** 0.003 3.28

Yield (qq/ha) 0.015*** 0.005 3.17

Shock (yes=1) -0.969*** 0.200 -4.83

Certified (yes=1) 0.061 0.193 0.32

R-square = 0.67 Adjusted R-square = 0.63 F-value (11, 105) = 19.42***

Heteroscedasticity: Chi2 (1) =0.55; Prob > Chi2= 0.4586 (Constant variance)VIF = 1.31 (mean): None of the independence variables > 1.65 VIF (No multicollinearity)Model has no omitted variables (ovtest ): F (3, 102) = 0.46; Prob > F = 0.7107

*** significant at P = 0.001; ** significant at P = 0.05; * significant at P = 0.10. Model : Linear Regression

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Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUW

-2-1

01

2R

esi

du

als

6 7 8 9 10 11Fitted values

Residual – versus - fitted plot (rvfplot): Randomness of the estimated errors

[Coffee income (Log)]

2222

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Methodology

Results

Conclusions

IUWSummary and Conclusions

1. Differences between certified and non-certified farmers: Significant factors: education level, yield, shade, process upgrading,

membership, documentation and shocks. Non significant: gender, experience, income from coffee

2. Value chain analysis and impact of certification: The major actors in Nepali coffee value chain: input suppliers,

smallholder farmers, pulper operators, cooperative and private companies.

Benefits from certification: - a passport to entry international markets - price premium: 6 -20% for the certified smallholders. - farmers experience environmental benefits.

3. Major entry barriers to the international market: -inconsistency in quality and low quantity supply

4. Results from regression models: Results from the logit model: (decision to adopt process upgrading) Significant factor (+): Level of education, book keeping, training

received, access to credit and trust. However, certification dummy (-) Results from the OLS regression: (smallholders’ income from

coffee sector) Significantly factors (+): experience, yield, process upgrading,

membership, % of shade tree covers, altitude (>1000 m). However, production related shocks (-).

2323

Problem Statement

Literature Review

Research Objectives

Conceptual Framework

Research

Methodology

Results and Discussion

Conclusions

Recommendation

IUW

Recommendation

Investment should be made in product and process upgrading by improved production management through extension and research and investment in wet process upgrading at farm level according to altitudes.

Finally, significant factors from LOGIT and OLS regressions models have to be considered in designing strategies aimed at improving livelihood status of smallholders.

THANK YOU FOR YOUR

ATTENTION !!