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

• PNG Coffee Industry Corporation, Papua New Guinea

Coffee growers in PNG fall into two broad sectors: the estate (comprising block holders and plantations) and the smallholder sector. Of the two it is the smallholder sector that produces most of the country's coffee, accounting for 85 per cent (56,100 tonnes) of production. The estate sector has been in decline over the past two decades and now produces only 9,900 tonnes.

Coffee export is an important component of PNG's economy - 10 per cent of PNG export revenue is coffee, generating 5 per cent of GDP. Almost 400,000 rural households grow coffee and 20,000 people are employed in the processing and marketing areas. But quality of coffee parchment derived from the beans is a perpetual problem. And one of the major obstacles to the improvement of coffee quality is failure of the current marketing system to give the right price signals to growers, in terms of different prices for different qualities of coffee parchment.

Some smallholder producers are commanding price premiums through their involvement in collaborative marketing arrangements. They have established long-term working relationships with suppliers who pay premium prices in return for quality coffee. This is a departure from current practices of paying a single price regardless of quality, guaranteeing a return to smallholders but in turn sacrificing overall quality. The alternative arrangements where groups of growers are linked to processors suggest that tying price to quality can lift product quality if the working relationship provides sufficient market signals and information.

This project investigated the prevailing market structure, seeking to identify the factors that prevent market intermediaries from rewarding growers for quality, and to recommend a course of action to bring improvements to the market.

The project aimed to improve the economic returns to PNG smallholder coffee producers and the industry, through delivering a more consistent and higher quality product. The major objective was to better understand the factors influencing adoption and ongoing success of the collaborative collection, pricing and processing schemes, and to plot strategies for their successful expansion.

The research team gained a picture of the innovative collaborative collection, pricing and processing schemes that seek to achieve superior quality coffee through a review of those currently in operation and identifying the quality assurance (QA) systems currently operating within the industry. Team members conducted detailed face-to-face interviews with selected participants (growers, processors, traders and exporters) who were engaged in coffee collection, pricing and processing schemes then analysed the results of the interviews to identify those schemes that lead to increased profit for smallholder coffee producers. They then developed in-depth case studies of selected schemes.

Their studies led to collation of information from which could source and develop pilot program materials and processes. The researchers gave support for the extension and replication of successful collaborative collection, pricing and processing schemes within the PNG coffee industry. They introduced Coffee Industry Corporation staff and selected industry participants to the appropriate knowledge and skills necessary for them to facilitate the adoption of QA systems, and identified and documented on-going improvements in quality as they monitored the extended schemes.

This project focused on identification of smallholder strategies for improving coffee quality at the community level. It did not address the three major overarching issues that currently constrain the potential quality of the coffee produced in PNG, namely: (1) the poor state of the roads and transport infrastructure; (2) lawlessness; and (3) the insecurity of land ownership and tenure.

To improve the quality of the coffee produced by smallholder coffee growers, three broad strategies were available: (1) encourage the sale of red ripe cherry direct to the wet mills; (2) adopt standardised processing systems at the village level; (3) pursue accreditation under Fairtrade, Rainforest Alliance, Organic and/or Utz Certified.

It was evident that parchment was purchased at a significant discount to cherry, reflecting the lack of control and the variability that is inherent within smallholder parchment. On a per kilogram parchment equivalent basis, the sale of cherry results not only in a 34 per cent price premium, but entails significantly less work and costs for the growers. There are savings in processing and transport costs, there is less likelihood of product deterioration through poor and inappropriate storage in the home (smoke damage and moisture) and less risk of theft.

The researchers found that where smallholder coffee farmers could not sell cherry to wet mills, standardised processing systems were needed at the village level. However, price incentives would only be achieved where smallholders could achieve a parallel increase in scale. This was best achieved through the formation of collaborative marketing groups that transact directly with traders and exporters. The success of these collaborative marketing groups will demand that the groups have some sustainable competitive advantage, are well managed and appropriately led. Groups which are based around traditional family or 'haus' lines will have the greatest chance of being sustainable in the long term.

The research team reported that since much of PNG coffee is grown with minimal inputs and is very much in sympathy with the environment, there are opportunities for smallholders to pursue accreditation under Fairtrade and Organic. However, growers must be mobilised into collaborative marketing groups and linked directly to an exporter who is willing to assist.

With PNG coffee growers receiving more than 70 per cent of the FOB (Lae) price, the team found little evidence to support the premise that smallholder coffee growers in PNG are subject to exploitation by downstream market intermediaries. Furthermore, the team found no evidence to suggest that grower-direct marketing will provide higher returns to growers. Quite to the contrary, given the small volumes and the risks associated with managing exchange rates, the price differentials and the inherent risk that the product may fail to meet the customer's specifications, smallholder coffee growers do not have the expertise to perform these activities any more efficiently than the existing traders and exporters.

To improve the linkages between smallholder coffee growers and the exporters, the team recommended training in budgeting, agronomy and rehabilitation, processing and marketing. With a greater understanding of the market dynamics, risk management and the costs associated with export, relationships between smallholder growers and their respective exporters would improve. Structured tastings with growers would provide a means to demonstrate how the major faults associated with the production of parchment influence the taste. Another recommendation was the staging of workshops to assist grower groups in the maintenance of pulpers and the adoption of standardised processing systems.

In the delivery of the training, the team advocated use of a Participatory Rural Appraisal and Planning Process (PRAP) model with the inclusion of a Personal Viability Training (PVT) module to facilitate more enduring relationships within the community and to raise self-awareness.