Grounds for Investment: Opportunities in Southeast Asia’s Coffee Industry
By Kimberly Wright, Dezan Shira & Associates
Posted: 28th July 2015 08:31Southeast Asia has an ideal climate for coffee cultivation. While Vietnam has traditionally led the way for coffee production in ASEAN, other countries in the ten-nation bloc are steadily growing as coffee exporting nations.
In particular, Indonesia, Laos and Thailand are markets that are both under-saturated and open to foreign investment. In this article, we provide an overview of the coffee industry in these countries.
Indonesia is the third-largest coffee producer and exporter in the world. Cultivation of coffee first began in Western Java under colonial Dutch rule in the 17th and 18th centuries, and it has now spread through other regions of the country, with production taking place in Sumatra, Sulawesi, Kalimantan, the Lesser Sunda Islands of Bali, Sumbawa, Flores and Papua. Top destinations for Indonesia coffee exports are the U.S., Japan, and Western Europe. Exports have doubled from 2001 to 2013, from 5.6 million to 10.94 million 60-kg bags, according to the International Coffee Organization.
The coffee industry in Indonesia is very susceptible to weather changes because production still relies on traditional methods. Over the past five years, production of 60kg bags has fluctuated from 10.5 million in 2010, 9.35 million in 2011, 8.3 million in 2012, 9.5 million in 2014, to 8.8 million in 2015. In the growing season for October 2013-2014, Indonesia exported 3,501,000 60-kg bags of coffee, down thirty percent from the previous year. More than 90 percent of coffee production across Indonesia’s 1.3 million hectares of coffee farms is done by farmers who own individual plots of no more than one hectare in area. Increasing the use of modern technologies and increasing consolidation across the industry would lead to higher coffee production.
Roughly 75 percent of coffee produced in Indonesia is Robusta, a bean that is considered to be lower in quality than Arabica. However, Indonesia also produces much sought-after varieties such as Java Arabica, Sumatra Lintong, Toraja, and Aceh coffees. In addition, it also produces the world’s most expensive coffee, kopi luwak. This luxurious brew comes from coffee beans that are fermented as they pass through the digestive tract of the Asian palm civet, a cat-like animal that is fed only the most select coffee cherries.
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Per-capita consumption of coffee in Indonesia is quite low in comparison to other top-producers of coffee. Consumption in 2012 was 1.2kg per person, compared to 7kg in Brazil, 4kg in the US, and 10kg in some European countries. Still, coffee culture in Indonesia has been is growing as urbanization increases, and coffee consumption is projected to rise by 17 percent this year.
The import tax for green coffee beans is very low, at 5 percent. In addition, the Presidential Regulation No. 39 of 2014 limits foreign ownership in plantations to 95 percent, and the Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.
Laos is the third-largest coffee producer in Southeast Asia, following Vietnam and Indonesia. Coffee was first introduced to Laos’ southern Bolaven Plateu region in the 1920s by French colonialists. Laos has abundant uncultivated land, and the volcanic soil and the high altitude in the southern regions make Laos a prime location for coffee cultivation. The town Paksong is called the “coffee capital” of Laos.
Exports of green coffee beans reached 500,000 60kg bags in 2015, an increase of 38 percent from the 290,000 60kg bags exported in 2010. In addition, coffee production in Laos has also been increasing. In the 1990s, Laos only produced around 83,000 60-kg bags of coffee, but this has now more than quadrupled to 500,000 60kg bags of coffee in 2013. Production is expected to quickly expand with technological improvements in cultivation and processing and as recognition grows for Laos’s coffee.
Coffee production in Laos often comes in the form of social entrepreneurship, as the coffee industry is seen to be a way to alleviate poverty for farmers. Opium cultivation has traditionally been one of the primary sources of income for Laotians, a fourth of which live in poverty, and the coffee industry has been considered a more sustainable way to provide economic opportunity for Laotians. Examples of recent successful investments include Saffron Coffee, which produces wet-processed organic Arabica coffee that is cultivated by ethnic minorities (Mien, Khmu, Hmong, and Gasak) in the mountains of northern Laos. China’s Yunnan Changshengda Investment Company signed a contract with the Laotian town Phongsali to plant 120 million square meters of coffee plants in order to replace poppy fields. Currently, around 20 thousand Laotian families, many of which are ethnic minorities, rely on the coffee industry as their primary source of income.
65 percent of coffee produced in Laos is lower-grade Robusta coffees, although the Laos government and development agencies have been involved in increasing the production of Arabica and specialty coffees, which can provide a higher income for the farmers. In the past, many Laotian coffee beans have been distributed to the Soviet Union and its communist allies. Currently, exports often go to France and Western European countries, where there is more demand for Laos’ high grade organic beans. Domestic consumption of coffee is quite low at .89kg per capita, but this number will likely rise as the economy develops.
Import taxes for green coffee beans is set very high, at 40 percent, in order to protect the domestic industry.
Despite having a great geographical location for coffee cultivation, production of coffee in Thailand is low compared to areas like Vietnam and Indonesia, reflecting opportunities for business and investment. For example, Dao-Heuang Group, one of the top coffee producers in Laos, has recently made plans to expand cultivation and production to areas in northern Thailand in order to meet the group’s goal to double its revenues to US $320 million in 2018. The Thai Coffee Association has also been working to promote the competitiveness of the coffee industry by pushing for the creation of specialty flavors and products in order to allow Thailand to gain a more competitive advantage in the industry.
In 2015, coffee exports reached 825,000 60kg bags. Exports peaked in the early 1990’s, following strong global market prices for coffee in the 1980s. World coffee prices began to drop in the 1990’s due to the International Coffee Agreement in 1989, and the Thai government even created a five-year plan in 1992 to encourage coffee farmers to cultivate more lucrative crops. Coffee production has fluctuated around 850,000 60kg bags over the past five years, and its growth is said to be affected by the recent political unrest. As the political situation becomes more stable in Thailand, it is projected that the performance of the coffee industry will continue to grow to meet the growing demand of its urban consumers.
Coffee cultivation occurs mainly in the south, where Robusta is the main variety cultivated, but roughly 500,000kgs of Arabica coffee is produced in the northern areas. Some Arabica varieties, like the Catuai and Typica strains that are grown in the northern village of Maejantai, have received world recognition.
Thailand is currently a net importer of coffee. Domestic coffee consumption is increasing by approximately 12.5 percent a year, and reached 1.25 kg per capita in 2015. Instant coffees are preferred due to their affordability (Nestle products occupied a retail volume share of 60 percent in 2013), but fresh coffee products are expected to increase following increases in disposable income.
In order to protect its domestic industry, there are steep import taxes for coffee: 30 percent for green coffee beans, much higher than the global average import duty tax of 14.1 percent. The import tax for instant coffee is 9 percent.
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