Conference: Rwandan Coffee Sector

The Rwanda coffee conference was held in Kigali on February 9th, 2015. The event brought together 85 policy makers, private-sector participants, donors, and researchers to discuss ways forward for the sector.

Recommendations and way forward

The participants at the conference welcomed the introduction of the draft coffee policy as a positive step forward in boosting the sectors performance. Throughout the course of the day several key recommendations for the sector and edit of the draft policy were recommended.

Summary of the day

Opening session

Dr. Richard Newfarmer, International Growth Centre (IGC) Country Director for Rwanda, outlined the ambitious targets for export growth set out under EDPRS 2, of 18% growth per year in total exports, and how rapidly the sector has grown: from two washing stations in 2002 to over 200 today. Increasing the proportion of fully washed coffee (FWC) offers a way to achieve significant increases in export revenue – doubling the proportion of FWC to 80% should increase coffee export revenues by 10-20%.

Hon.Gerardine Mukeshimana, Minister of Agriculture, highlighted the importance of the sector: coffee is the primary source of income for 400,000 farmers in Rwanda. Efforts to improve the value chain would have significant benefits for a range of stakeholders, just as better regulations could help to create a level playing field. She sought feedback on the new coffee policy, with key dimensions of how to boost farmer productivity, the need for better research into increasing yields, and the question of how to ensure that washing stations are operational and effective.

Panel 1: Enhancing the coffee sector – Issues and Overview

Professor Rocco MacChiavello presented the policy implications of a large-scale research project conducted in Rwanda. The data for the study came from a survey of 178 coffee washing stations (CWS) since 2012, in partnership with NAEB. Aggregate capacity utilization is well under 100%, with around 50% in 2014 despite profitable investments to be made in FWC. There is also a significant heterogeneity in the efficiency of these stations, where unit costs in the least efficient stations are over two times higher than the most efficient. The central explanation for these differences appears to be the strength of relational contracts between the farmers and the washing stations. Key problems relate to these contracts. For example, higher levels of local competition make it harder to maintain good coffee washing station-farmer relations, and the strong transmission of world prices makes loans to stations difficult, costly and risky. Due to this, some 60% of CWS are credit constrained.

Professor MacChiavello outlined the spectrum of regulatory options, from anarchy to monopoly, across countries. This includes regimes of contract enforcement in Costa Rica and Burundi, the use of zoning regulations in Kenya and marketing regulations in Ethiopia. Key question: how can we strengthen the relationship between farmers and CWS, and how does this relate to access to finance?

Dr. Celestin Gatarayiha provided an outline of the government’s new coffee policy. Within the overall development framework provided by EDPRS 2, the policy aims to improve the quality and scale of research into the coffee sector. Key principles discussed included: the emphasis that the value chain is a private, not state-run, activity; that exporters should operate under a liberal market environment; and that development services should be provided to all farmer categories. Key policy objectives include the enhancement of extension services, strengthening coffee farmers’ organizations, promoting value addition at all stages, establishing a Coffee Research Fund, and promoting the domestic consumption of coffee. There is currently very little connection between the farmers and the CWS or exporters –everything works through middlemen. With high competition between CWS, the key recommendation of the presentation was that a policy of zoning districts to regulate competition may be warranted.

The discussion focused on the questions of zoning policy and access to credit. Chief Economist Leonard Rugwabiza argued that the quality of management in CWS might be an important explanatory variable. Also, that the experience of Laterite and TechnoServe was instructive – by visiting the farmers regularly, the uptake of a new fertiliser technology became much higher. It was not sufficient to simply inform farmers, but instead needed lots of human oversight to ensure uptake.

Jonathan Argent made the point that any changes in the sector take a very long time – with around 3 years lead time between planting a coffee tree and collecting cherries. Some questions remained unanswered: why capacity utilization seems to be decreasing year-on-year, and how much additional profit FWC provides.

Alex Kanyankole, the Chief Executive Officer of BRD, raised that it is not easy for the private sector to invest in the maintenance of coffee fields, and that other stages of the value chain may be more amenable for investment. Price volatility on world coffee markets – from a spike in 2010 and a downwards trend since – makes it hard to sort out issues lower down the value chain.

The Minister of Agriculture and Animal Resources raised an important point: isn’t low farm-level productivity a more important constraint to growth in the sector than the marginal gains of increasing the proportion of fully washed coffee?

Nupur Parikh questioned whether a potential zoning policy could reduce trust, if the quality of washing by the local station remained low. Celestin Gatariyaha responded that the competitive effects of zoning will depend entirely on the structure of the zoning policy.

A representative from the Rainforest Alliance questioned whether different ownership structures of stations affected performance. Professor MacChiavello responded that different management practices and structures within the stations do not seem to affect prices significantly, but that particularly TechnoServe-managed stations were much better managed.

Panel 2: Conditions on international markets, value chains, access to finance

Nupur Parikh presented on the initiatives of TechnoServe, an NGO. They run three related programmes: a wet mill programme, a sustainable agronomy programme, and a certification programme. They focus on business training, access to finance and technical support. Their micro-washing stations are small, but easy to scale up. With the establishment of a new model where private exporters compete to provide specialised services to cooperative wet mills, they have seen significant decreases in financial risks. Farmers receive working capital in small tranches, with frequent CSP staff visits, the delivery of coffee to secure warehouses, and the provision of daily information on the maximum buying price from international markets. An SMS-based system, used by around 25% of all CWS, provides reliable data on the accounts of the stations.

Fred Kiteng’e, from Root Capital, focused on the need for training in financial management. Other challenges include low productivity, outdated equipment, variable prices, and fraud (particularly in Kenya and Tanzania). The opportunities include the introduction of simple systems for accounting and inventory control, and the chance for complimentary crops and income sources. Better training and better access to credit would lead to business growth.

Cory Bush, from Falcon Coffee, emphasised that buyers currently have to pay a risk premiums to work in Rwanda and that this affectsthe supply chain. Providing a buyer’s perspective, he said that buyers need reliability, repeatability, regulation to minimise default risk, and differentiated products. Accessing better tools of price risk management represents a solution to many of these problems – for example, the lack of price risk management tools in the Ethiopian Coffee Exchange (which represents 92% of coffee sales in the country) leads to dramatic boom and bust systems.

Marcelo Pereira, from the Coffee Quality Institute, focused on the role of differentiation. Washed coffee is much safer and less likely to ferment, but can create a lot of environmental waste if incorrectly managed. Washing matters less than the quality of the coffee: even natural/semi-washed coffee can fetch a premium if the quality is high. The key obstacles to better quality include the distribution of revenues far away from farmers in the value chain, institutional structures like ECX which minimise differentiation and variation in prices, and farmers earning insufficient incomes to take care of the trees optimally. Coffee certificationis likely to become a pre-requisite for market access.

Harrington Namara, from TradeMark East Africa, highlighted how coffee is almost entirely a buyer’s market. He questioned how good the export agencies were at marketing East African coffee, and mentioned the legal constraints of pre-financing coffee purchases.

Panel 3: Policies and experiences in other countries

Norman Mutekanga, from Uganda Coffee Development Authority, outlined the shift in Uganda’s coffee sector from highly centralised to extremely decentralized. With very low barriers to entry, farmers are assured of 70% of the export price of coffee, but they are not insured at all against price fluctuations. Additionally, a number of speculators in the market compromise estimation markets.

Endris Negus, from ECX, provided an overview of the structure of the pre- and post-Ethiopian coffee systems. He explained that the establishment of Ethiopian coffee exchange was due to fact that coffee farmers were not receiving fair prices. With the establishment of coffee houses, grading system and coffee quality has made easy coffee traceability from various coffee washing stations.

Professor PepitaMiquel-Florensa, from Toulouse University, described elements of the Costa Rican model. Similar to Rwanda, Costa Rica is a small, well-run state, with coffee largely grown by smallholders. It has been very successful in breaking into the specialty market, with a system where coffee beans essentially belong to the farmers until they leave the country. Farmers are guaranteed a certain share of the exports, farmers are exposed to less risk, the system is very transparent- final liquidation is published in newspapers,, and there is good cash flow management and lower working capital needs. The key downside is that the informational burden is high due to the amount of reporting required.
Andrew Guinn, from Duke University, provided an overview of Burundi’s coffee sector. Their sectorial performance is lower than Rwanda’s. The value chain is structured with around 600,000 small farms, 191 CWS, 8 dry mills, 3 major exporters and around 35 specialty buyers. Trying to imitate the Costa Rican model of guaranteed revenues to farmers, the profusion of middlemen undermines the effectiveness of the system. Additionally, many farmers are not aware of desirable qualities to cultivate in their coffee, partially as a result of low access to finance.

Francois Sihimbiro, from SNV Rwanda, described four business models of coffee cooperatives in Rwanda. The cherries collector model simply sells to nearby CWS. Investments in processing models are those like TechnoServe. Vertical integration models exist where numerous cooperatives band together to improve their bargaining power. And lastly, a number of joint venture cooperative/private collaborations exist. Major challenges include governance, access to finance, management and access to markets.

The Minister of Trade and industry raised the point that coffee washing stations with no interest in exports or farming will lack trust, and so just increase added costs. Little attention is being paid to production systems, and the management question is central. What is the best way to ensure that farmers have a good buffer against unexpected shocks? How could such a stabilisation fund be funded?

Panel 4: Wrap up session and the way forward

Dr. Richard Newfarmer, from IGC, provided an overview of the lessons learnt from the day. The focus should not just be on expanding exports, but on increasing the incomes of farmers. There is ample room to add value – washing is one dimension, and increased productivity, financial issues, and product differentiation are others. Rwanda is well placed to absorb international lessons, and there is a role for technology to monitor prices and outputs. Many questions around the zoning policy remain unanswered, as well as issues around environmental damages.

Ambassador George William Kayonga, the Chief Operations Officer of NAEB, said that the conference had helped to answer why returns in the sector are not rising with the investments made. Zoning could build flexibility or hinder farmer negotiations. Innovation is needed: both to differentiate the Rwandan product and to improve access to finance.
Hon Tony Nsanganira, Minister of State for Agriculture and Animal Resources, pointed out the key role of relationships in the sector to determine exports, but also issues of traceability, environmental management, and regulation.

Wrapping up the day, Hon Francois Kanimba, Minister of Trade and Industry, reinforced the importance of the sector in meeting ambitious trade deficit targets. The debate mainly focused on how to improve the efficiency of the coffee value chain in maximising incentives. Efficiency is about building productive partnerships between the key agents and removing unnecessary middlemen reducing the benefits flowing to farmers. Shortening this chain between farmers and exporters will create renewed momentum in the sector.