Introduction

I. Relevance of the study

            In developing economies, agriculture is argued to have 5 potential contributions to the rest of the economy (John W. & Mellor 1972 p.5, Kuznet 1965 p.244):

a)     supply food and raw materials to other expanding sectors in the economies;

b)     provide an investable surplus of savings and taxes to support investment in another expanding sector;

c)     sell for cash a marketable surplus that will raise the demand of rural population for products of other expanding sectors;

d)     supply labor surplus for other expanding sectors;

e)     relax the foreign exchange constraint by earning foreign exchange through exports or by saving foreign exchange through import substitution.

            Thus, agriculture, and especially agricultural export sector, play the key role in capital accumulation in the first stage of economic development. However, agricultural exports in developing countries have been facing with both internal and external constraints in the sector’s development process. Up to now there have been a great deal of studies on agricultural exports in general [1] while very little focus has been found on a specific commodity. A concrete commodity has its own characteristics, then it possesses various distinct opportunities and challenges. Therefore, by focusing on the coffee industry, this thesis is expected to specify findings of previous agricultural studies.

Vietnam is in the process of economic transformation and industrialization. The demand for foreign exchange is pressing. How and where Vietnam can access to the needed foreign exchange? Recent experiences of developing countries shows that the foreign borrowings and foreign direct investment is not sustainable sources[2] then should, to reasonable extent, rely on domestic sources. In the context of poor industry in Vietnam, the agricultural exports is the crucial one. While rice export is intensively discussing, previous researchers seem to ignore the role of coffee export which is the second largest agricultural contributor in export earnings. In near future it is expected to be the largest one, because increasing population pressure will not allow Vietnam to export rice as much as presently does. 

Moreover, coffee industry also create positive linkages to the economy through the above mentioned channels. First, this supplies input and creates incentives and conditions for developing coffee processing sector. Second, the investable surplus can be attracted from many sources in coffee industry, namely export taxes, fees and household savings. Third, the development of coffee production for export in poor rural areas is building the ‘vent’ for marketable surplus. Under-employed resources such as labor, land can be put in full use, then increasing farmers’ income, pushing up the aggregate demand, etc. Fourth, along with the said development, labor per unit of land will be reduced thanks to technological progress, creating labor surplus that can be utilized by other sectors.

Recognizing of the importance of the coffee industry, this paper intends to examine, under the structuralism’s  point of view, whether Vietnam coffee industry is on the right track of development or not and to defend the argument "institutional constraints prohibit the coffee industry from achieving stronger development". After identifying these constraints it makes some suggestions, by probable ways, to remove them.

II.    Focus and scope of the research :

II.1. Focus: the research will concentrate on

a. the structure of USA coffee market as a proxy of international market.

b. the structure of coffee’s domestic marketing channels for export:

n      Coffee production

n      Coffee processing

n      Coffee export

II.2. Scope

            The thesis just only focus on the supply side of the coffee industry. The demand side will also be referred as it is relevant.

Timeframe of the study  :  The research will concentratedly study the coffee industry in recent years. However, to have a dynamic picture of developing process of coffee industry in Vietnam, period of 1986-1998 is chosen.

III. Research questions :

1.     What is the typical agricultural marketing system in developing countries

2.     What is the structure of the world coffee marketing system and its implication for exporters in developing countries.

3.     What are the main factors generate the growth of the coffee industry in Vietnam in the period of study? And what are the problems the industry is facing with in producing and marketing coffee.?

4.     Can the marketing agents (in coffee industry) be attributed to these problems? If so, by what way?

5.     What are the pros and cons in promoting coffee roasting and developing arabica coffee in Vietnam?

6.     What policy recommendations can be drawn from above analyses to further develop coffee industry?

IV. Limitations of data and information

            The data and information are mostly drawn from Dak Lak province as a proxy for the case of Vietnam’s coffee industry. Then, sometimes these do not match with those in other provinces that also produce coffee. Interviews with persons in charge in some big enterprises dealing with coffee are also used as a source of information in the thesis, thus this information might be personally distorted by interviewees.

V. Structure of the thesis

This thesis is arranged into 6 Chapters excluding Introduction which are:

n      Chapter 1: in addition to theoretically analyzing gains and structural problems in agricultural trade, the Chapter sketches out the typical agricultural marketing systems in developing countries.

n      Chapter 2: presenting the common features in the international market for coffee, and taking Colombia as a case study.

n      Chapter 3: re-assessing the growth/development of Vietnam’s coffee industry in the study period.

n      Chapter 4: analyzing the coffee marketing system in Vietnam with the role of each coffee marketing agent.

n      Chapter 5: considering other aspects related to the development of Vietnam’s coffee industry.

n      Chapter 6: summary and recommendations.

Chapter 1: Theoretical Framework

I. Introduction

This chapter will consider 2 main points: first, the gains from trade under the viewpoint of international trade theories and the structure of the world agricultural market; second, the typical structure of marketing systems in developing countries. 

II.  Gains from trade under the view of traditional trade theories

International trade theories can be categorized into two groups: the traditional and new trade theories . The traditional trade theories presume that trade takes place because countries are different. The differences between countries that drive trade may lie in resources, technologies, or even in tastes. The new ones say that countries may trade because of economies of scale (Krugman 1994). Its means that the larger scale of production the less average cost of production then trade can take profit of these advantages (Todaro 1994, p.429). However, trade based on economies of scale mostly takes place in industries where economies of scale prevails. Therefore, in this section we just mention the traditional trade theories. Although these theories fail to measure the quantitative benefits, they shed a light on the qualitative gains of international trade. 

II.1 Comparative advantage theory  

This is the fundamental theory in international trade, which argues that: ‘Nations should specialize in production of and export the commodities in which its absolute disadvantage is smaller (this is the commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater (this is the commodity of its comparative disadvantage)’ (Salvatore 1990, p.25).

D. Ricardo presented this theory firstly in 1817. In 1936 G. Haberler explained the theory of comparative advantage on the opportunity cost theory . According to Haberler, the opportunity cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity. Then a country has comparative advantage in producing one commodity over the other if it has lower opportunity cost in producing this commodity. Thereby, the real output, income and consumption will be greater for both countries than it could be in the absence of trade.

             The largest contribution of these scholars is that they pointed out, in principle, the orientation of international trade. Accordingly, the export industries should base on the national comparative advantages.

II.2. Heckscher-Ohlin theory :

The essence of Heckscher-Ohlin theory is that different countries are differently endowed resources (land, labor, capital and etc.,), then a country has comparative advantage in the products which are intensively using its abundant resources during production process. Vietnam is lack of capital but abundant of unskilled labor and endowed with the suitable climate for coffee planting, while coffee planting is a labor-intensive industry, thereby Vietnam’s concentration on coffee export is relevantly explained by the Heckscher-Ohlin theory.

II.3. Vent-for-surplus theory of international trade

The "Vent-for-surplus theory of international trade" was elaborated by Burmese economist Hla Myint from ideas of Adam Smith, points out that promotion of export is the efficient way to make use of underutilized resources (Todaro 1994, pp.429-430).

According to this theory, by accessing to the world markets, developing countries can make use of formerly under-employed land and labor resources to produce greater output for export to foreign markets, and commercialize the agricultural production.

Conclusions :

In international economics there are many theories explaining the gains from trade under different perspectives such as Trade Based on Product Differentiation, Trade Based on Different tastes, (Salvatore 1990, Chap.6) Technological Gap Models, etc., (Posner 1961, “International Trade and Technical change”, Oxford Economics Paper, cited in Salvatore 1990, p.167), however just three aboved-mentioned theories are the most relevant in explaining agricultural trade.  They show the great potential benefit from international trade for developing countries. The shortcomings of these traditional trade theories are: they are based on unreal assumptions such as fixed productive resources, fixed and freely available technology for all nations, perfect competition in the market, etc. Consequently, these theories just are of generality not of concrete, they overlook the inherent obsta cles in international trading.

III. The common features of international agricultural market

III.1. An overview of the world market

Theoretically, developed countries (DCs) initially well endowed with the vital resources to economic growth and development such as capital, entrepreneurial ability, scientific capacities, the ability to carry out technological research and development and skilled labor then they can produce high quality, high-priced and more market-adapted products. Developing countries (DgCs) by contrast, endowed abundantly with supplies of unskilled labor, poorly with necessary resources as mentioned above. So DgCs just can produce and export simple, labor-intensive products that are primary products. This sets up unfavorable structure of the world market for DgCs. The DgCs export mostly labor-intensive products with low quality, low price and marketing inflexibility for which the world demand prospects and terms of trade may be very unfavorable[3] , and they often find themselves locked into a stagnant situation that perpetuates their comparative advantages in unskilled, unproductive activities. DgCs unambiguously face sluggish demand for their commodities. The per capita income elasticities of demand for agricultural foodstuff and raw materials are relative low compared with those for fuels, certain minerals and manufactures. This means that only sustained high rate of per capita income in the developed countries can lead to even modest export expansion of these particular commodities from developing countries.

III.2. The structure of the agricultural market

Agricultural commodities are primary products, so they not only confront the common structural problems as a primary product but also face particular obstacles.

             Firstly, agricultural products are being produced much more efficiently in DCs than in DgCs (see Table 1). Thereby, DCs are not the importers but increasingly becoming the main exporters of agricultural products in the world market.

            Secondly, the agricultural products of DgCs are facing high trade barriers when entering into DCs as well as DgCs markets, including tariff and non-tariff barriers (See Table 2). The non-tariff barriers include quotas, licenses, or other types of surveillance, administrative barriers, and health and safety rules. The markets for DgCs’ agricultural products seem contracting. In 1996 DCs exported USD186 billion of agricultural products while DgCs only recorded of USD133 billion (FAO 1998, p.17). The main reason for setting up the barriers is to protect employment and standard of living in rural areas in these countries. 

Fortunately, the structure of beverage crops market (coffee, cocoa, and tea) look more brightly. DgCs are the sole exporters of beverage crops, because the climate in DCs is not suitable for growing these crops..

            To sum up, in agricultural trading fields, there are great potential benefits for both developing countries and developed countries. In general, the agricultural market structure, however, seems to incline to the developed countries and to be unfavorable to the developing countries. Consequently, when taking part in international trade the latter must take the unfavorable market structure as given and adjust their agricultural marketing structure accordingly.

IV. Agricultural Marketing System in Developing Countries

Agriculture marketing  includes all activities that are involved in transforming, storing, transporting, and promoting agricultural products to the domestic consumers or foreign buyers (Elz 1997, p.5). These functions are closely interwoven into the whole national economy and materially contribute to the economic and social development of a country. This section tries to spell out theoretically the role and structure of the systems in the economy. And in this section the agricultural marketing system just means non-food marketing system only.

IV.1. The Agricultural Marketing System and Development  

IV.1.1. Interaction between Agricultural marketing and the economy  

At different stages of development agricultural marketing play different roles in the economy. At the subsistence level, agricultural production is confined in a self-sufficient system, farmers cater basic needs themselves. So the agricultural marketing is not essential for agricultural sector at this stage. When farming aims to produce marketable surplus or called commercial farming , farmers depend on the markets not only to sell their products but also to get the necessary inputs for production. Obviously, agricultural marketing play an indispensable role in this type of farming. It is demonstrated by its following functions:

            - to provide farmers with signals about products and crops in which they specialize;

- to make inputs, technologies, techniques of production, and information available for farmers when needed;

- to provide necessary services such as storage, procession, and transportation, to forward the products to consumers in the most efficient way.

The marketing system makes a significant contribution to the general economy by adding value, by generating employment and by increasing productivity in agricultural production. At the same time the agricultural marketing is also driven by development elsewhere in the economy as showed in table  below.

Table 1: Indicators of improvements needed in agricultural marketing

Indicators	Improvements needed
Strong population growth and urbanization	- Development of infrastructure - Development of communication - Price and institutional adjustment
Insufficient growth of agricultural  production	- Improvement of logistics and production services, that is, supply of inputs credit, research and extension.
At first stage of development	- Increase productivity of production to produce marketable surplus - Development of market
Advanced stage of development	- Processing industries and development of high-value products

IV.1.2. Individual groups involved in marketing systems

Generally speaking, there are four main groups of individuals influence the marketing system: Producers, Traders and Trade planners and decisionmakers and customers.

Agricultural producers are generally interested in maximizing their net farm income while reducing the risk of producing and marketing their production. Traders are interested in improving the efficiency of the exchange of goods. Their ultimate end is profit, then they are concerned about lowering the cost of operation and price paid to producers and try to maintain low competition within their domain. Planners and decisionmakers have social political goals, generally related to stabilizing prices, expanding domestic production and export markets. Not only do the individual marketing interest groups face conflicts among each other, but they also face considerable problems in achieving their marketing goals.

Table 2: Potential Problems for Individual Interest Groups in Agricultural Marketing

Producers	Traders	Customers	Trade decisionmakers
Sales    -Lack of customers    -Lack of transport    -Lack of funds    -Lack of storage	Logistics    -Dispersed supply    -Inefficient transport    system    -Insufficient    information system    -Lack of facilities and    services	Supply    -Lack of input for    operation    -Various grades of    commodity quality    -Exporters’ unstable    trade policies	Supply    -Spatial distribution    and transport    -Storage    -Suitable processing    -Qualitative and    quantitative losses
Market position    -Isolated location,    unsatisfactory market    -Dependence on    buyers    -Little market    transparency    -Small quantities of    supply per producers	Working conditions    -Unfavorable  conditions for    competition (storage,    processing, etc.)    -Lack of professional  knowledge    -Unstable trade legislation    -Political discrimination    -Lack of means to access to foreign markets	Demand    -Diversified tastes    -High substitutes    -High demand    elasticity	Prices    -Absolute price level    -Relative price level    -Price transparency    -Exchange rate
Economics    -Subjectively      determined low    producer prices    -Large supply in    market overall    -Lack of liquidity	Economics    -Low price paid by foreigners    -High direct and    indirect cost    -Lack of liquidity    -High transaction  cost	Economics    -Large sunk-cost    requires to position    of brand in retail    market and    processing facilities	Economics    -Productivity    -Credit
Special risks    -Price fluctuations    -Physical sales risk    -Insecure income    -Insecure input supply	Special risks    -Large price fluctuations    -Supply fluctuations    -Insecure legal system    -Large physical losses	Special risks    -Supply fluctuation   -Demand fluctuation [4]	Special risks     -Integration and    concentration    -Minorities    -External trade    -Foreign policy

 

IV.2. Improving agricultural marketing system

The agricultural marketing system evolves along with the development of the economy. So improving agricultural marketing system in developing countries depends very much on the specific situation in each country and to certain extent on the international aspect. Figure 1 provides a conceptual framework for improving agricultural marketing system.

     The figure above just describes the general framework for improving agricultural marketing system in developing countries. The specific activities needed are presented in the table below.

Table 3: Alternative Activities for Improving Agricultural Marketing

Kinds of development	Improvements needed
Infrastructure	Development of large and rural markets, storage, processing industries, foods, communication, and information systems
Market organization	Development of state, parastatal, and private marketing organizations, such as marketing boards, cooperatives, and private trade Support and strengthening of self-help organizations, especially for small-holders
Market information and extension	Regular reporting and projection of agricultural marketing, especially prices and volume Development of marketing extension services for producers and marketing organizations
Agricultural market administration	Standardization and quality control Development of planning capacities Strengthening of professional competence of agricultural marketing administration
Training	Creation of training institutions and programs for people and organizations involved in marketing
Research	Market systems analysis Development of appropriate marketing technologies Demand and supply analysis Projections and market behavior
Credit	Small-holder supply and market credit Investment credit for marketing institutions

Source: Adapted from Elz, D. 1987, p.11

Some of these measures require little financial input to improve efficiency of marketing. Others, particularly, infrastructure and buildings require a great deal. In all cases, however, professional expertise is required to implement and maintain these activities. The marketing training in DgCs should be mostly based on the local research and experience with specific situation in each country at its particular stage of economic development.

IV.3. Alternative Agricultural Marketing Institutions

IV.3.1. Alternative agricultural marketing institutions

In developing countries there usually are 4 broad organizations providing marketing and associated services for farmers:

n      Independent private firms operating within some institutional framework such as assembly and auction markets or exchanges, possibly with some mechanism for cushioning extremes price fluctuations;

n      Transnational companies using processing technologies, economies of scale and established market outlets;

n      Farmers’ associations or cooperatives;

n      Marketing boards or other state agencies.

IV.3.2 Comparison between these institutions

+ Indigenous independent private firms:

These enterprises operate at very low costs. Decision-making is concentrated, allowing them to efficiently take advantage of and exploit unforeseen opportunities, follow up new ideas, start up and go along with very little capital, as well as response quickly to changing situation. So this type of marketing institution is specially suitable in trading products that need special storage and processing and change sharply in prices in response to variable supplies such as coffee business.

The farmers are mainly small and located discretely, then the quantities sold and bought by each customer are small and varying. Thus those sales and purchase require considerable local knowledge, patience, and willingness to work for long hours at many location. With such requirements, private enterprises also demonstrate themselves to be the most suitable.

+ Transnationals:

This kind of enterprise has many advantages in agricultural marketing.

They can bring capital into a country to acquire land, facilities and to provide a working base. They can also bring in equipment, improved seeds, strategic supplies, skilled management and technologies.

The transnationals are also experienced in meeting international quality standards, can help developing countries overcome such barriers to penetrate into foreign markets and enhance value of exports.

The great advantage of transnationals is that their brands have strongly positioned in importing markets and they own an widespreasd outlets and retail network in major importing markets.

Therefore, establishing a close link with a transnational is the best way to maintain market access for exports.

+ Cooperatives:

Cooperatives help farmers benefit from economies of scale in the use of transportation and other services through increasing the volume of commodities handled at one time and raise their bargaining power in sale transaction. It performs especially well in such conditions as specialized producing areas distant from their major markets, concentrated and specialized production, homogenous production, and groups of farmers dependent on one or few crops for their total income (e.g. coffee planters), assembling fairly standard, not-very-perishable products (such as coffee and cotton) for sales in pre-established markets in which the price risk is small or for exporting. Especially in coffee industry in many developing countries, this institution combines efficiently distribution of fertilizer with marketing the crop on which it is used. This constitutes a practicable basis for distributing inputs on credit.

+ Parastatals:

These organizations are common vehicles manipulated by the government in applying public capital implementing, government price policies, determining marketing policies, and assigning marketing monopoly. Theoretically, the government just makes up the guidelines for these institutions, in terms of day-to-day operations they are autonomous. Generally, these organizations’ contributions to agricultural development are observed as follows.

n      They moderated supply and price fluctuations in domestic markets by buying into and selling from buffer stocks .

n      Export marketing monopoly can obtain high return for the growers if they control enough the total volume going to a particular market to be able to influence prices.

n      Monopolies in domestic markets are assigned to parastatals to concentrate sales of products through a particular processing plant to justify investment, to facilitate collections from small consumers of credit repayments and other dues, and to implement market separation programs by which higher overall prices can be obtained. Coffee, cocoa, and cotton are typically sold by standard quality specification and are widely handled by parastatals.

IV.3.3 Constraints and support management

Each type of marketing institutions has its own advantages and disadvantages. The government should have appropriate kind and level of support to each type to utilize their advantages and restrain disadvantages.

+ Private enterprises:

The collusion among these enterprise may keep prices down to producers and up to consumers. In DCs, private marketing enterprises have been also considered to be too small and too numerous. They cannot afford storage systems, modern technology, sorting and managing quality of products after purchase because of capital constraints. Consequently, their product quality and responsiveness to market are limited. In these cases, the government should introduce new enterprises and remove all entry barriers, create an equal competitive market for all these enterprises. The most efficient ones will likely to develop to larger scale.

+ Transnationals:

DgCs may become dependent on and thus dominated by transnationals. However, the dependence on transnationals is subject to the  political and economic policies of each country. That situation has become one in which the government of a developing country can access the `benefits of transnational investment or collaboration and can then bargain over the terms.

+ Cooperatives:

Lack of capital, inexperienced decision-making groups, loose commitment of members, etc. all can make the coperatives less responsive to changing marketing opportunities. The decisions made centrally do not always provide inputs or sell output to the right place, at the right time, with the right quality or to the right customers. These constraints could be minimized if cooperatives satisfy such conditions as local leadership and management, a well-educated membership, and members all belonging to one family group with strong kinship ties or integrated by religions.

+ Parastatals:

The interference in parastatals’ operations by the government may cause corruption by government officials and rent-seeking  from parastatals. Subsidies for parastatals to stabilize their supply and prices are often continuing burdens for the governments.

If buyers’ preferences are varied, an exporting marketing parastatal with monopoly power may obstruct price signals from an industry seeking to adjust production to its requirements and producers and consumers will be obliged to use its services and commodities, will bear the burden of its costs. Therefore, a parastatal monopoly should be maintained only if it permits a certain marketing function to be carried out more efficiently than what would be feasible otherwise.

       Chapter 2:  Coffee Industry: External Consideration

I. Introduction

The purpose of this chapter is to spell out the supply and demand in the world coffee market. Colombia is chosen as a case study of operation of the coffee industry in DgCs because: first the natural conditions for producing coffee in Colombia is, to some extent, similar to Vietnam’s (altitudes, climate, rainfall, etc.); second, coffee exported from Colombia is reputed to be the highest quality in the world[5] , then Colombia’s experience may be useful for Vietnam; third, Colombia, like Vietnam, export coffee mostly under form of green coffee beans.

II. The world coffee market    

II.1. Supply

 In the world coffee market Brazil and Colombia are the two biggest providers of green coffee, thus they are of influence on the world coffee market. In addition DCs cannot produce coffee due to lack of suitable natural conditions.

Therefore, the weather condition, the health of the coffee trees and harvesting practices also affect the supply of coffee. Furthermore, a new-planted tree takes 3-4 years to produce first cherries, thus  green coffee response to price change in the world market with a lag of 3-4 years. Historically, the frequent frost in Brazil [6] and the lag in supply response to coffee price changes are the two decisive factors generating the “boom and bust” cycles in coffee market.

II.2 Demand

The demand for green beans is the derivative one by roasters. In periods of normal price variation, the demand for roasted coffee is price inelastic. However, when coffee prices show big increases, consumers tend to reduce their consumption commensurately.

The demand is usually distorted by the buyers (roasters). J. Morissets (1997) found that the spreads between international and domestic commodity prices of coffee in six countries: Canada, France, Germany, Italy, Japan and US increased dramatically over the periods 1975-1994. For example, the price of green coffee declined by 18% on world markets but price of roasted coffee increased by 240% for consumers in the United States between 1975 and 1993 (Ibid., p.28). He proved that the presence of large trading companies in international commodity markets caused this “asymmetric responsive price”. Morissets argued that many of these companies are large enough to have a dominant position on most commodity markets, their strategic position between buyers and sellers allows them to influence the transmission of world prices. These companies generally provide information, define the terms of transactions, manage the payments and record keeping for transactions, and so figure out ways of clearing the market. So when the world price declines their obligopoly power allow them to keep the domestic price up to maximize profit, by contrast, when the world price rises, they mostly transfer the high world price to domestic price. Mc Laurent (1996) when studying the coffee market in USA had put forward similar conclusion.

However, roasters have to import purely green coffee to maintain a minimum amount of input to keep the operation efficient (in large scale) and remain their position in the roasted coffee market. High fluctuation in green coffee supply may causes loss to the roasters. In addition, weather conditions may cause shortage of green coffee supply (e.g. frog in Brazil) then the roasters may suffer loss if there is not a mechanism to encourage coffee exporter to store.  

III. Coffee industry in Colombia

      Colombia is the second largest coffee exporter in the world after Brazil. Coffee is grown by 300 thousand small and medium-sized farmers with an average of 3ha each. The natural condition is favorable for producing coffee, and enough rainfall (1500-2500mm per year) to make irrigation unnecessary.

            Coffee farmers in Colombia practice ‘selective picking’, in which only the ripe coffee cherries are harvested on each pass. As a result, the coffee trees are typically harvested 6-8 times per season. Growers themselves carry out much of the processing, using the ‘wet processing’ method. The green coffee beans are then sold for further cleaning and selection. The processing and export industry is composed of both private companies and coffee cooperatives. Although Colombia does produce soluble coffee, virtually all of its exports are in the form of green (unroasted) beans.

            The Federacion Nacional de Cafeteros Colombianos (the National Federation of Colombian Coffee Growers or FEDECAFE) has played an important role in developing the coffee sector. With revenues generated from a small export tax, FEDECAFE funds coffee research at various centers, an effective extension system, and a coffee inspection service. It also funds projects to improve infrastructure and social services in coffee-growing areas and to diversify income among small farmers. FEDECAFE also sponsors a successful world-wide advertising campaign to maintain Colombia’s reputation as a high-quality producer. The advertising campaign is only successful, however, because it is backed up by efforts to ensure coffee quality. Colombia defines six grades of export-quality Excelso coffee based on seven criteria: humidity, aroma, color, bean size, defects, foreign material, and taste. Coffee that does not meet Excelso standards cannot be exported by law and is marketed domestically.

Chapter 3:  An Overview of Vietnam Coffee Industry in Period of 1986-1998

I. Introduction

            The aim of this chapter is to present some characteristics of coffee industry in Vietnam and to sketch out a dynamic picture of the industry in period of 1986-1998. It puts forward some preliminary assessments on comparative advantages of Vietnam coffee industry, on its competitiveness, on production system and marketing channel in general and their operations in the period.  

I.1. The background of coffee tree

I.1.1. Crop characteristics

Coffee trees, or bushes, grow primarily in subtropical climates. There are two types: arabica and robusta. The Arabica coffee has milder flavor, and fetches higher prices on the world market in comparison with the robusta coffee. Coffee is vulnerable to frost and many diseases, especially the soil-born disease that can destroy the farm massively.

I.1.2. Processing characteristics

The processing can be divided into two stages. Primary processing involves conversion of harvested coffee cherries into green coffee beans[7] and is always done in the producing countries. The secondary processing involves the transformation of green coffee beans into final consumer products such as roasted beans, ground coffee, and soluble (instant) coffee. Secondary processing is almost always carried out in the consuming country. Coffee traded in the world market is mostly in form of green coffee beans, meaning coffee after primary processing. Coffee beans are shipped and warehoused in natural fiber bags, and coffee sales are usually accomplished through the use of inspected samples offered by importers and brokers. So the quality and then price of coffee beans are crucially affected by the primary processing.  

There are two types of primary processing. The dry method is generally used with robusta coffee. It involves harvesting the coffee cherries and drying them to reduce moisture content from 25-60 percent to 10-15 percent (Minot 1998, p.46). The quality of the green beans can be further improved by cleaning, sorting, and grading. The wet primary processing method is generally used for arabica coffee. First the coffee cherries are fed into pulping machine that removes the soft outer layer, leaving the green beans and a sticky covering. The green beans then are put into tanks of water for 6-72 hours. During this time, the sticky covering ferments, allowing it to be removed by repeated washing. Finally, the green beans are dried, cleaned, and sorted as in the dry method.

II. Competitiveness of Vietnam’s coffee industry

II.1. Concepts

n      Competitiveness is a dynamic concept. Economists such as Fafcham, M. and G.H. Peter (eds) (1995), E.Siggel and J.Cockbum (1995) introduced alternative definitions, however there is no universal agreement among them. One of the reasons is that the term is used with reference to both enterprises, industries, countries and even supranational regions. However, it can be inferred from these definitions that determinants of competitiveness of an industry come from comparative advantages and productivity of the industry.

II.2. Comparative advantage of Vietnam’s coffee industry

The table below show that opportunity costs of using land and capital for producing coffee is lowest. It means that coffee has comparative advantages over these commodities.        

Table 4: Profit Rates of Agricultural Commodities                                   Unit: %

Commodity	Rice in Mekong delta	Coffee	Rubber	Ground-nut	Pork	Tea
m/(c+v)	35.45	40.40	18.15	17.89	4.07	-12.41
capital opportunity cost	1.143	1	2.226	2.258	9.926	-
land opportunity cost	5.354	1	4.294	9.484	-	-

Source: MARD 1998, p.20

II.3. Productivity        

            The data from FAO indicate that land productivity of planting coffee in Vietnam is the highest in the world, and 3 times more than the average level of the world. This, to certain extent, presents that Vietnam has an absolute advantage over other countries in producing coffee.   

            Vietnam has great comparative advantages in planting coffee, and this is the crucial factor creating the competitiveness of Vietnam’s coffee in the world market. However, the competitiveness of Vietnam’s coffee industry is based mostly on natural factors such as land productivity, climate, etc. This competitiveness can be enhanced or eroded subject to man-made factors such as processing, exporting systems. It seems that these factors have undermined the natural competitiveness of Vietnam’s coffee industry because despite generous endowments and naturally good quality, Vietnam’s coffee has still been discounted in the international markets. These factors themselves prevent Vietnam’s coffee industry from developing further.

III. Coffee production

III.1. Production system

III.1.1. G