Final Thesis Defence-rishi

THE IMPACT OF COFFEE PRODUCTION ON NEPALI SMALLHOLDERS IN THE VALUE CHAIN by Rishi Ram Kattel

Supervisors: Prof. Dr. Ulrike Grote Prof. Dr. Dieter M. Hörmann Prof. Dr. Bernhard Hau

IUW

Financial support by DAAD is acknowledged.

Final Thesis Defence 1 24th Sep. 2009

Outline 

Problem Statement



Review of Literature



Research Objectives



Conceptual Framework



Methodology



Results



Conclusions

IUW Problem Statement Literature Review Research Objectives Conceptual Framework Methodology

The Facts of Nepali Coffee • The agricultural sector is the backbone of Nepalese economy 38% share GDP 2.8% annual growth rate, 66% labor force (employment).

Coffee farming on the foothills of the Himalaya. Photo: Field survey, 2008.

• Coffee share: 7.3% share in country‘s total 15% agricultural export share. • Annual growth rate: 35% coffee production and 25% production area.

Results Conclusions

• 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 3

IUW Comparision of Nepali Coffee Sales, Sales, 2004 to to 2007 Development of Nepali Coffee 2004 2007 Problem Statement

Research Objectives Conceptual Framework Methodology Results

Green Beans in Metric Ton

Literature Review

120

114

100 80 80

66

67

60 40 20

37

Domestic Market

40

34

37

2004

2005

0

Conclusions

International Market

2007

2006

Fiscal Years

Total Green Beans Marketed: 181 MT (in 2007). 1. International Market: 63%; Japan (55%), Europe (34%), USA (3%) & 2. Domestic Market: 37%

other countries (8%) 2007 )

(Source: CoPP/Helvetas, 4

IUW

Major Problems in Nepali Coffee Sector Problem Statement

Literature Review

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

Research Objectives

• Lack of marketing strategies.

Conceptual Framework

• Low economies of scale in production

Methodology

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

Results Conclusions

Need to identify and recommend upgrading strategies.

5

IUW

Literature Review: Value Chain

Problem Statement

Technology Production

Literature Review

Process

Research Objectives Conceptual Framework Methodology Results Conclusions

Input Supply

Production

Processing

Marketing

Consumption

Component of general value chain.

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).

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)

6

IUW Problem Statement

Literature Review

Research Objectives Conceptual Framework

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).

Methodology Results Conclusions

 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). 7

IUW Problem Statement Literature Review

Research Objectives Conceptual Framework Methodology Results Conclusions

Major objective: To examine the impact of coffee production on Nepali smallholders’ livelihoods taking their integration into value chain into account.

The specific objectives are: 4. To assess the differences between certified and non-certified Nepali coffee farmers. 6. To understand the function of the Nepali coffee value chain and investigate whether certification scheme offers additional benefits to the smallholder coffee producers. 8. To assess major entry barriers of Nepali coffee in the international market. 10. 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.

8

IUW Problem Statement

With Certification

Coffee Producers

Without Certification

Literature Review Research Objectives

Chain Performance:

Conceptual Framework

Type of contract Marketing condition Coffee quality

Methodology

Production System Efficiency: Input & Output Organizations

By whom ??

By whom ??

Results Conclusions

Marketing Chains

International Market

Domestic Market

Conceptual Framework. Source: Own illustration 9

IUW Gulmi District

Certified: 60 HHs Marketing: Cooperative

Problem Statement

Kavre District

Non-certified: 60 HHs Marketing: Company

Literature Review Research Objectives Conceptual Framework

Capital

Methodology Results

Study Area

Conclusions Major coffee growing districts Other coffee growing districts

10

IUW Problem Statement

Research Methodology 

Survey Method: Purposive selection of districts and villages and



Survey Techniques:

Literature Review Research Objectives

random sampling of smallholder coffee farmers.

1. Coffee producers’ survey: Semi-structured interviews with 120

Conceptual Framework

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)

Methodology Results

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

Conclusions

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.

11

IUW Problem Statement

Descriptive & Comparative Statistics: Variables Continuous:

Total Average

Certified

Non-certified

(N=120)

(n=60)

(n=60)

t-test, X -test 2

Mean

SD

Mean

Mean

t-value

Literature Review

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

Research Objectives

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**

Conceptual Framework

Yield of coffee in 2007 (qq/ha)

24.5

22.91

20.7

27.8

-1.844*

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

Methodology

Results

Conclusions

Income from coffee (Rs.)

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

12

IUW Problem Statement

F: 8.923***

(32.2)

Literature Review

F: 2.480*

a

(33.2)

a

(23.3)

Research Objectives

ab (20.2)

Conceptual Framework

(13.3)

b

b (11.4)

b

( ) : mean

Methodology

F : F-test

Results

Conclusions

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*

***significant at 1%; **significant at 5% level; *significant at 10% level. Here, 1 US $ = Rs. 71.06 Different letters a, b indicate significant difference of mean ( α = 0.05 ).

13

IUW

Nepali Coffee Value Chain: Two Districts Investigate

Problem Statement

Input Suppliers

Literature Review Research Objectives Conceptual Framework Methodology

Results

Conclusions

Certified Farmers

Non-certified Farmers

Pulper Operators

45% Dry Cherry (90%) Dry Parchment (10%)

Dry Parchment (20%)

Cooperative

Companies

(Certified)

(Conventional) 65%

90% 30% wet processed GB 70% unwashed GB/RB

Filter Coffee (2%)

Domestic Market

Wet processed Green Beans (GB) only

International Market

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IUW Problem Statement Literature Review Research Objectives

Organic Certification What are the major benefits from certified organic coffee production? • Price premium ? Farm gate • Other benefits? Price Premium: 20% in per kg FC & 6% in per kg DP

Price premium

Conceptual Framework

Price (2007/008)

Certified

Non-certified

t-test

Fresh Cherry (Rs./kg)

30

25.08 ($0.35)

11.195***

Methodology

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

Results Conclusions

Ground Coffee (US$ /kg) (CR 7.5:1) Green Beans (US$/kg) (CR 6.6:1)

($ 0.42)

300 ($ 4.22) 640 ($ 6-12)

300 ($ 4.22)

No premium (domestic market)

426 ($ 4-8 )

Premium for cooperative (export)

***significant at 1% level Note: 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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IUW

Other benefits from certification Problem Statement Literature Review Research Objectives Conceptual Framework Methodology

Results

Conclusions

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 = 47 Note: 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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IUW Problem Statement Literature Review Research Objectives Conceptual Framework Methodology

Results

Conclusions

Findings from Expert Interviews & SWOT Analysis Export requirements: • Variety: Identification is necessary • Supply continuation of high quantity • Quality consistency • 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

High - Medium

Medium

(related to product & process upgrading)

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. 17

IUW

1. Logit model (to determine the farmers‘ decision to adopt process upgrading)

Problem Statement Literature Review Research Objectives Conceptual Framework Methodology

Results

Conclusions

Li

 Pi  = In   = Z 1 − P i  

Yi= f ( βi xi )

i

= α +

n

∑

i=1

β i.x i + ε

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

i

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

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

Yi (PROCESS upgrading at farm) = a dichotomous dependent variable (1 if farmer sells dry parchment after wet processing, 0 otherwise) 2. OLS regression (for determinants of annual HH income from coffee sector)

InY COFFEE = α + β1. Age + β 2 .Experience + β 3 . Adult + β 5 . Pr ocess + β 5 .Member + β 6 .Service + β 7 . Altitude +

β 8 .Shade + β 9 .Yield + β 10 .Shock + β 11 .Certified + υ i --------- Equation (2)

InYCOFFEE

= Annual HH income from coffee sector in 2007 (In Natural log form) Source: Gujarati, 2003

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IUW Problem Statement Literature Review Research Objectives Conceptual Framework Methodology

Results Conclusions

Logit 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) Adult (number)

0.110* 0.094

0.060 0.183

0.019* 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) Poor (< US $ 1.25/d/p = 1) Certified (yes = 1)

1.196** -0.441 -2.466***

0.636 0.653 0.716

0.194** 0.076 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 =0.9286 Area under the ROC curve = 0.8990 Overall 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). 19

IUW Problem Statement

OLS Regression estimates:

[for determinants of annual household income from coffee (in natural log)] Variables ( N= 117)

Coefficients

S.E

t-value

Literature Review

(Constant)

5.991***

0.458

13.06

Age (years)

0.002

0.006

0.42

Research Objectives

Experience (years)

0.059***

0.014

4.14

Adult (number)

0.020

0.040

0.51

Conceptual Framework

Process upgrading (yes=1)

0.622***

0.186

3.34

Member (yes=1)

0.499**

0.197

2.54

Methodology

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

Results

Conclusions

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

20

Problem Statement

2

IUW

Research Objectives Conceptual Framework

Residuals 0

1

Literature Review

-1

Methodology

Conclusions

-2

Results

6

7

8 9 10 Fitted values [Coffee income (Log)]

11

Residual – versus - fitted plot (rvfplot): Randomness of the estimated errors 21

IUW Problem Statement Literature Review Research Objectives Conceptual Framework

Methodology

Summary 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.

Results

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

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) 22 Significantly factors (+): experience, yield, process upgrading,

IUW Problem Statement Literature Review Research Objectives

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.

Conceptual Framework Research Methodology Results and Discussion

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

Conclusions

Recommendation

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