MINEACOM Workshop on Trade & Export Development Kigali, Rwanda 14 th December 2016 Session II Understanding Constraints to Value Addition in Rwanda s Coffee Sector Ameet Morjaria Assistant Professor of Managerial Economics & Decision Sciences Kellogg School of Management Northwestern University
Outline 1. Big picture: why should we care? 2. Rwanda s Coffee Sector: quick re-cap on transformation of the sector break down of the value chain diagnosis of critical challenges and possible opportunities
Poverty reduction in Africa lags other regions Percent of Population living in Poverty (<$ 1.90 /day) 80 70 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sub-Saharan Africa South Asia Latin America & Caribbean East Asia & Pacific Europe & Central Asia Low & middle income Source: WDI 2016
Rwanda: rapid progress Percent of people living in Extreme Poverty ($1.90/day) Source: WDI 2016 80 70 60 50 40 30 20 10 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Export Revenue from Fully Washed Coffee (%) Sub-Saharan Africa Rwanda 80 70 60 50 40 30 20 10 0 Share of Export Revenue from Fully Washed Coffee (%)
Rwanda: important transformation Percent of people living in Extreme Poverty ($1.90/day) 80 70 60 50 40 30 20 10 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 80 70 60 50 40 30 20 10 0 Share of Export Revenue from Fully Washed Coffee (%) Source: WDI 2016; National Bank of Rwanda Annual Reports (various) Export Revenue from Fully Washed Coffee (%) Sub-Saharan Africa Rwanda
Rwanda: important transformation 2015
Rwanda Coffee Sector Context o In 2000s low-quality, low-volume cycle: commodity-grade coffee producer o New GoR targeted coffee as a priority sector (after several strategy sessions), adopted 1999-2003 Coffee Strategy & Action Plan (increase production, improve quality, promote greater equity in value distribution) and kept elaborating the plan Horizon 2010 Coffee Action Plan. Liberalization. Strategic realignment. o Embraced assistance in cooperative formation and private sector advisory e.g. USAID (e.g. ADAR, PEARL, SPREAD ) o Focus on quality e.g. Cup of Excellence competitions since 2008 o Pre-2002: quantity as only measure of performance, GoR controlled, vulnerable to price movement o Post-2002: quality as only criterion for remuneration, role of private sector, potential for Rwandan coffee to become single-origin o Fully washed (Arabica) exports: 1% in 2002; 21% in 2010 and 50% in 2015
Rwanda Coffee Sector Explosion in entry of washing stations Number of Coffee Washing Stations 300 250 200 150 100 50 0 2002 2005 2008 2011 2014 # of CWS Average farm gate price of cherries RFW/Kg 300 250 200 150 100 50 National avergae farm gate price of coffee cherries (RFW/Kg) Source: Authors calculation on NAEB annual report, OCIR-Café reports (various)
Rwanda Coffee Sector Explosion in entry of washing stations and increase in price of coffee cherries Number of Coffee Washing Stations 300 250 200 150 100 50 0 2002 2005 2008 2011 2014 # of CWS Average farm gate price of cherries RFW/Kg 300 250 200 150 100 50 National avergae farm gate price of coffee cherries (RFW/Kg) Source: Authors calculation on NAEB annual report, OCIR-Café reports (various)
Rwanda Coffee Sector Export volume of washed coffee increasing 100% 90% 80% 70% Export by coffee type (%) 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Semi Washed Coffee Fully Washed Coffee Source: Authors calculation on NAEB Annual Statistics, National Bank of Rwanda Annual Reports (various)
Rwanda Benchmarking Volume produced 20,000 15,000 Quantity '000 of 60 Kg Bags 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Ethiopia (A) Uganda (R/A) Kenya (A) Tanzania (A/R) Rwanda (A) Burundi (A) Peru (A) Colombia (A) Costa Rica (A) Source: International Coffee Organization 2016
Rwanda Benchmarking Volume produced 5,000 Quantity '000 of 60 Kg Bags 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Uganda (R/A) Kenya (A) Tanzania (A/R) Rwanda (A) Burundi (A) Peru (A) Costa Rica (A) Source: International Coffee Organization 2016
Rwanda Benchmarking Pricing 200.00 Price paid to growers in exporting countries (US cents/lb) 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Other Milds Rwanda Brazilian Naturals 1990 1995 2000 2005 2010 2015 Source: International Coffee Organization 2016
Rwanda Value Chain
Rwanda Value Chain Farmers
Rwanda Value Chain Farmers, Washing Station
Rwanda Value Chain Farmers, Washing Station, Exporters
Rwanda Value Chain Farmers, Washing Station, Exporters, National issues
Constraints at Farm level Yield o Yield per tree is low: average 2.8 kg/tree potential 5-7 kg/tree o Implications for export: how many 60 kg bags can be produced from 1 ha? 22 19 14 14 10 9 8 8 7 5 5 3 Source: TNS, Conversations with NAEB, authors calculation
Constraints at Farm level Investment and input usage o Investment limited between 2009-2015: Increase in new coffee trees 25%, Currently 26% of coffee tree stock beyond productivity age (> 30 years) o Extremely low input usage: 40% of the coffee farmers use basic practices in their coffee husbandry BIG GAINS, no need of scientific breakthrough NAEB addressing this recent MOU with CEPFA fertilizer and pesticide fund moved to CEPFA (30% funded by GoR, and levy on exports) Under CEPFA they procure and distribute inputs Improvement in application prior to 2015: 35%, recent figures 59% Challenges remain: leakage, adequate warehouse facility, quantity of fertilizer, local level monitoring (1 district extension officer: 13,000 farmers, in UG 1:35,000 and Colombia 1:500) Recent appointment of new service provider should help This is crucial to get right. Multiplier effect Source: discussion with NAEB technical staff
Constraints at Washing station Utilization and relationship management with farmers o Capacity utilization improving: 2011: 49%; 2015: 60% o Ruthless competition: 2015: average CWS sourcing from 4 sectors nearby & facing 6 other CWS competing in its sector o Hurts long term relationship with farmer, private CWS have 35% of procurement from repeated farmers whereas cooperatives have 45% from repeated farmers o Financial implications: when dealing with private CWS, 87% of the purchases from farmers are paid by cash at the time of delivery, whereas cooperatives 70% o NAEB implementing zoning policy
Constraints at Washing station Operational challenges
Opportunity at Washing station Large gains to small improvements in quality 87+ 85-87 Fully-washed, 50% of export 80-85 Cupping Grade < 80 Semi-washed, 50% of export
Opportunity at Washing station Large gains to small improvements in quality Micro-lots Specialty coffee Premium coffee 87+ 85-87 80-85 Fully-washed, 50% of export Cupping Grade < 80 Semi-washed, 50% of export
Opportunity at National level Improving lending to washing stations o Different financial implications of fully washed versus unwashed coffee o FWC financial cycle very different from unwashed coffee o Export contract execution and payments take place much much later in the season for washed compared to unwashed which can take a week o Important to get financial organizations to work together with GoR, and coffee sector o (related need patient capital for certification not commercial lending)
Opportunity at National level Rwanda origin? o Leading off-taker s of Rwanda Coffee: Swiss 56%; EU 40%, ROW: 4% o Under Sustainable Coffee Program major coffee roasters have set a goal of procuring sustainable coffee sales from 8% to 25% o Close to 50% exports to large traders hence limited impact of origin/ certification o However for the other 50% of sales it would pay huge dividends if Rwanda origin is marketed
Opportunity at National level Rwanda origin? 120 Search terms as percentage of overall search activity worldwide 100 80 60 40 20 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee 0 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: authors calculation on Google Trends, accessed Dec 12, 2016
Opportunity at National level Rwanda origin? 120 Search terms as percentage of overall search activity worldwide 100 80 60 40 20 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee 0 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: authors calculation on Google Trends, accessed Dec 12, 2016
Opportunity at National level Rwanda origin? 120 Search terms as percentage of overall search activity worldwide 100 80 60 40 20 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee 0 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: authors calculation on Google Trends, accessed Dec 12, 2016
Opportunity at National level Rwanda origin? 120 Search terms as percentage of overall search activity worldwide 100 80 60 40 20 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee 0 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Source: authors calculation on Google Trends, accessed Dec 12, 2016
Opportunity at National level Rwanda origin? o Kenya s AA washed coffee branding
Opportunity at National level Rwanda origin? o Idea not completely new for Rwanda o Rwanda s early success in 1999 was NGO (USAID-PEARL) support of Abahuzamugambi Cooperative o Recall: in 2006 Starbucks selected CWS coffee for their ultra-premium Black Apron. The coffee was sold for $13 per half-pound at 5,000 retail outlets in North America and sold out faster than any previous Black Apron coffee
Opportunity at National level Appellation? o geographical indication, whereby a product s given quality or reputation is linked to a geographical origin e.g. appellation in wine and cheese o Ethiopia s experience (Sidamo, Harrar, Yiragacheffe), long road, recall the UN arbitration (GoE vs. Starbucks). Appropriate infrastructure and capacity is needed: GIS data, office of intellectual property, policy & enforcement, awareness at all levels of chain, monitoring and follow-up mechanism o I understand this is back on the agenda at NAEB
Recap: several opportunities Yield improvement n Input usage n Input access CWS n Small improvements in quality Zoning policy n monitoring n enforcement National level n Financial implications of FWC n Rwanda Origin
Thank You Murakoze Ameet Morjaria +1 857 991 7895 a.morjaria@kellogg.northwestern.edu