Assessing and extending schemes to enhance the profitability of the PNG coffee industry via price premiums for quality

During the first twelve months, this project has: (1) undertaken a comprehensive analysis of the major constraints impacting upon the quality of coffee in PNG; (2) identified eight collaborative collection, pricing and processing schemes that provide superior quality coffee to customers and reward smallholder coffee producers; (3) commenced a survey of growers, traders, processors and exporters to identify the alternative routes to market and the reasons why coffee growers choose alternative routes; (4) conducted two introductory workshops to advise industry of the project and to foster improved relationships between coffee growers and exporters; and (5) delivered an introductory HACCP training course to the CIC.

In attempting to improve the quality of the coffee produced by smallholder coffee farmers in PNG, three key issues have repeatedly emerged: (1) poor road access; (2) lawlessness; and, (3) problems associated with land tenure and ownership (tribal conflict). While each of these impediments is beyond the scope of this project, at the individual farm level, the major problem for the smallholder coffee growers in PNG is the need for capital to meet anticipated household and farm expenses. As household expenses (including school fees) and social obligations receive first priority, there are often insufficient funds available to provide for the costs of labour to prune the coffee trees and to provide sufficient fertilisers and chemicals. As the coffee industry has a very poor financial reputation, the major banks are unwilling to extend credit.

Conflict remains between farmers and market intermediaries due to the farmers' lack of understanding as to how prices are determined in the international market. Few farmers appreciate the financial risks that traders and exporters endure in a highly volatile commodity market. A greater understanding of risk management and the costs associated with export should result in an improved relationship between smallholder coffee growers and their respective traders and exporters.

An analysis of marketing margins indicates that coffee growers in PNG receive between 68-80% of the gross FOB price (Lae) for green bean. However, such margins are available only to those growers who are within close proximity to the traders and processors. For those growers located in more remote areas, transport costs will be appreciably higher and may consume most of the margin. Nevertheless, this figure indicates that the processing/exporting sector is relatively efficient and that growers are receiving reasonable prices as a percentage of the fob price.

It is evident, that parchment is purchased at a significant discount to cherry, reflecting the lack of control and the variability that is inherent in smallholder parchment. Where farmers are sufficiently close to a wet mill so that they can deliver the cherry to the mill on the same day of harvest, or where the mill itself arranges transport to collect the cherry, farmers are being actively encouraged to sell cherry rather than to produce parchment. By having control of the process from pulping, fermenting, washing and drying, processors are able to produce a finished product with very similar characteristics to plantation style coffees. As exporters are able to deliver a more consistent quality product to the market, not only is the discount on the New York Board of Exchange Coffee Futures Contract (NYC) reduced, but opportunities emerge for PNG coffee to enter the specialty market.

Expansion into the speciality coffee market has been encouraged by the recent arrival of Starbucks into PNG. In part, this has been responsible for the dramatic increase in the proportion of smallholder coffee sold as cherry for those growers who are close enough to a processing mill. Starbucks arrival in the market is also providing the major catalyst for the development of fully inclusive quality assurance programs that provide guidelines not only on the physical and cup quality characteristics, but also propose environmental, social welfare and equity conditions that preferred suppliers must meet. With Starbucks providing the price incentives, these developments align themselves very well with the project objectives, especially in promoting the need for quality at the farm level.

For those smallholders unable to access a wet factory, selling cherry is not an option. In such instances, farmers must produce parchment. Because of the small volume of parchment each individual farmer produces, smallholder farmers are unlikely to benefit from any improvement in quality without achieving a parallel increase in scale. This is best achieved through the formation of collaborative farmer groups, where the members, either collectively or individually, follow a strict quality assurance system that reduces the variation in quality. The formation of these collaborative farmer groups is seen to offer benefit even to those smallholder farmers and blockholders who sell cherry to processors. It is more cost effective to utilise such groups for the delivery of extension and training programs. However, the formation and on-going management of these collaborative groups is not without problems. Of particular importance is the issue of leadership to ensure that group members are not only fully informed, but that, in the event of the leader's demise, the group has the capacity to continue.

Over the last twelve months, this project has: (1) undertaken and prepared a Participatory Rural Appraisal and Planning report for each of the collaborative marketing schemes participating in this pilot program; (2) explored the relationships between actors in the PNG coffee industry; (3) delivered an introductory HACCP-based training course for the selected schemes; (4) developed and verified a generic HACCP-based quality management program for the PNG coffee industry; (5) identified barriers to the adoption of quality assurance systems among smallholder coffee farmers in PNG; (6) developed pilot training modules on the marketing of coffee and mechanisms to improve the quality of smallholder coffee; (7) updated numerous training manuals prior to the delivery of training programs identified and prioritised by the PRAP process; and (8) presented several papers to international research forum on the PNG coffee industry.

Some 6-9 months into the project, the project team identified the need to adopt the Participatory Rural Appraisal and Planning approach developed by the Department of Agriculture and Livestock and utilised by the Coffee Growers Support Services Division. PRAP is a participatory planning process conducted within villages or communities which establishes needs and develops action plans for collaborative farmer groups. The PRAP process involves three stages:
a description and analysis of the community through village mapping, seasonal activity calendars and history profiles
problem identification and solution generation through a Strengths, Weaknesses, Opportunities and Constraints exercise, problem listing and problem ranking
the design and programming of training activities to resolve the problems identified.

The PRAP has identified the need for five generic training programs: (1) a marketing module (5 days); (2) a financial management module (10 days); (3) an agronomy module (21 days); (4) a postharvest and quality module (21 days); and (5) a pest and disease control module (15 days). While these five modules will form the core of the training program, additional modules on nursery management and writing project proposals have been requested. While these modules will be developed by CRI, the training itself will be delivered by sub-contracted training providers.

In order to facilitate and monitor not only the training process but also the dynamics associated with the management of each group, a staff member from CRI and the regional extension office have been assigned to each group. There is within the literature, strong empirical support for the need to understand the group dynamic processes if collaborative marketing groups are to prosper. Although the issue of group leadership and transparency was not raised by any of the groups themselves, training on "personal wellness" will be delivered to each group by the CRI. There is already some evidence of this project contributing to the re-introduction of self governing community laws to kerb cherry theft, alcoholism, drug abuse, gambling and the spread of HIV AIDS.

The generic HACCP plan developed for the PNG coffee industry has identified two critical control points in the PNG coffee industry. Both are associated with chemical residues from; (1) the application of chemicals on-farm and the harvest of cherry before the prescribed withholding period; and (2) contamination from chemical residues in the packing of containers for the export market. Under the current systems of production, contamination at the grower level is unlikely. Providing that appropriate standard operational procedures are implemented to ensure that containers are cleaned before packing, the likelihood of contamination occurring during transportation is equally remote.

At the farm level, constraints to improving quality have been identified as; (1) the lack of labour; (2) the lack of water; (3) the lack of electricity; (4) the lack of capital to build/construct wet mills at the village level; (5) the inability of collaborative farmer groups to pay the farmers for cherry on receipt; (6) traditional practices; and (7) poor roads. Over the last twelve months, with the harvest in PNG falling well below expectations, the need to secure coffee to meet forward contracts has led to record cherry prices. Not unexpectedly, the incidence of cherry theft has escalated to such an extent that CIC has been forced to explore various options for the registration of growers and cherry traders. Such mechanisms are already inherent within the quality control programs necessary for registration under Fair Trade, organics and the Starbucks Caf Practices quality assurance scheme. However, it is also abundantly clear that within the coffee processing sub-sector, many of the wet mills are paying premium prices for poor quality cherry that is unlikely to achieve the specifications demanded by the specialty coffee segment. Furthermore and with regard to the existing quality regulations, there is a mismatch evident between the standards as defined by physical parameters such as size, colour and moisture content and the intangible quality attributes such as taste, body and aroma required by the specialty coffee market. As such attributes are highly subjective, they are difficult to communicate.

The project has requested and been granted a twelve month extension until March 31 2008.

Australian team members were advised in February 2007 of the need to review the time frames associated with the project as a result of the mid year general elections. As a result, training programs did not commence until October 2007. Given that many of the training programs are best conducted during the coffee season, a formal extension until September 30, 2008 was sought and granted.
It is becoming more apparent that without adequate support, collaborative marketing groups will struggle in PNG. With the need to aggregate the product until sufficient parchment has been accumulated, smallholder producers must forgo the opportunity to sell to roadside traders for immediate gain in the expectation of receiving higher returns. In the highly volatile international coffee market and without first establishing some rules and standards which govern the processing of cherry at the village level, there is some doubt as to whether higher prices will be achieved. Furthermore, and perhaps more importantly, there is an immediate need to re-establish community values and sanctions, particularly with regard to discouraging cherry theft and to address the root causes of social disorder. Personal viability training, introduced under this project, has been instrumental in facilitating more enduring relationships within the community and between group members. It is also becoming more evident that the more successful groups will be those which are based around traditional haus lines and where there is some enduring linkage with a trader, processor or exporter. These partnerships are more likely to result in farmers being able to access working capital, technical information and market information and are essential where smallholders seek accreditation under either organic or Fairtrade coffee.
To facilitate the delivery of training to the various farmer groups, a number of training modules have been prepared and/or updated. The delivery of the training modules was greatly facilitated by conducting a number of workshops with selected service providers to ensure that all parties understood what the project was seeking to achieve. A pre-training questionnaire was administered to each of the pilot groups prior to the commencement of the training to provide a benchmark and a post-training questionnaire will be administered at the conclusion of the training. Under the current system of training, the major impediment limiting the capacity of the project to replicate is the lack of sufficient service providers to deliver the training programs and an acute shortage of staff at Aiyura to administer the process.
There is, among the exporters, a widespread concern that yields will continue to decline unless farmers are encouraged to plant more coffee or to rehabilitate more trees. While high prices are resulting in a greater investment, the increasing incidence of cherry theft is providing a significant disincentive. Higher prices have been received as a result of a reduction in the discount. However, this cannot be attributed to any marked improvement in quality, but is more the result of exporters adjusting to the market dynamics and selling only what coffee they have available. With the margins for Y grade deteriorating, exporters are endeavouring to move more PNG coffee into the specialty market. As a result, there is increasing evidence to suggest that minimal intervention is required in the supply chain. With coffee farmers in PNG receiving as much as 78% of the fob Lae price, competition between the exporters to secure both cherry and parchment is intense and there is no evidence of any cartel or price fixing arrangements. Hence, in the current market, there is little evidence to support or to encourage direct marketing by smallholder coffee growers in PNG.
After much initial enthusiasm, it is evident that fewer exporters are pursuing accreditation under Starbucks Caf Practices. It is not only too difficult to meet the standards imposed by Starbucks, but many of the criteria do not apply to PNG, and other specialty coffee buyers are paying more than Starbucks to secure premium PNG coffee.
Nevertheless, there is a growing awareness of the opportunity to secure higher prices through a number of sustainable quality assurance programs including Utz Kapeh, Oxfam, Rainforest Alliance and bird friendly coffee. With such an abundance of quality management systems, there is some doubt as to whether there is any need for a generic PNG quality assurance system.