1. Introduction
1.1 Introduction and overview
1.1.3 Pu’er coffee development
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above sea level, are perfect for the production of quality coffee. Moreover, according to official data, Pu’er still conserves enough natural land resources —more than 10 hectares available for coffee cultivation— to continue with this fast development of coffee industry (Pu’er Coffee Office, 2013).
In 2012, the gross domestic product (GDP) of Pu’er amounted to CNY 36.69 billion, of which 30.8 percent belonged to primary industry, 36.4 percent to secondary industry, and 32.8 percent to tertiary industry; per capita GDP was a mere CNY 14,286. These numbers rank very low in comparison with the rest of the country and also for Yunnan; in fact, in terms of per capita GDP, Pu’er is positioned in the lower rank of all regions in Yunnan. Tea, forest products, electricity and mining are the major industries of the prefecture, accounting for over 70 percent of the total output value of the manufacturing sector (Pu’er Economic and Social Development Report, 2012). While still rather insignificant in economic terms, the fast development of coffee production currently taking place in Pu’er will transform this industry into a powerful engine for the region.
1.1.3.
Pu’er coffee development
Coffee was first introduced in Yunnan in 1892, when French missionaries brought seeds of Arabica coffee and successfully cultivated them in different counties of Yunnan province, including Lancang and Jiangcheng counties in Pu’er. For several decades, coffee was grown in Yunnan only for self-consumption. It was not until the 1950s that coffee was cultivated in a bigger scale and considered a tradable commodity. In the mid-1990s, Yunnan became China’s largest producer of coffee, and it has continued growing at a rapid speed ever since. In 2012, coffee growing in Yunnan reached over 66,000 hectares of area, accounting for over 70 percent of the national area for coffee cultivation, and 83 percent for China’s total production (Zhu, 2012, p.3). Pu’er is the largest coffee producer in Yunnan and hence the main coffee factory of China. There are four distinctive periods in the development of coffee industry in Pu’er (Pu’er Coffee Office, 2013, pp.7-8): experimental cultivation from the mid-1950s to the mid-1980s, large-scale cultivation from the mid-1980s to the end of the twentieth century, production shrinking from 1999 to 2007, and fast development from 2007 until now.
In 1956, Pu’er city introduced coffee grown in Hainan, and planted 225 kilograms in Jiangcheng, Simao, Menglian and Jingdong as trial. In Jiangcheng they also constructed a
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coffee farm and planted over 16 hectares of coffee. In 1961 they harvested one thousand kilograms of coffee beans. However, shortly after, coffee production stagnated due to pests and diseases, lack of technology, and poor management skills. In spite of that, during the Cold War years Pu’er and Yunnan served as providers of coffee for countries in the Soviet Block that were avid consumers of the drink but could not grow coffee themselves or buy it due to sanctions and embargo from the West (G02, March 18, 2014). This small-scale coffee supply was nevertheless insignificant for the development of the industry.
Deng Xiaoping’s 1978 Reform and Opening Up policy switched focus in the country from hard labor to economic profitability. Farmers were now encouraged to develop the economy to improve their lives and eradicate poverty. In Pu’er, the government targeted coffee as one of the main crops that could help farmers increase their incomes and escape poverty. In order to push that industry, in 1987 the local government contacted the factory of Nestlé in Dongguan (Guangdong) to establish economic cooperation, and to attract technology and financial investment. After negotiations with the government, Nescafé (Nestlé’s coffee brand), along with the United Nations Development Program (UNDP), agreed to help Pu’er grow quality coffee and in 1988 a large-scale coffee plantation was inaugurated. One year later, Nescafé formally commenced to experiment with coffee cultivation; they brought seeds for trial, foreign experts to train farmers and control quality standards, new technologies, pesticides and fertilizers, and, most importantly, they set up a protective price of CNY 12 per kilogram (G02, March 18, 2014). Owing to the success of these measures, Nescafé concluded a long-term sales agreement with Pu’er city that would help develop this industry at a faster speed. To complement these measures, several coffee institutions were established for the management and organization of coffee development. Only ten years after those measures were set, the total area of coffee cultivation expanded from little over 1,050 hectares to 12,134 hectares.
Unfortunately, an intense frost that hit Pu’er in 1999 severely affected coffee trees and production. Additionally, world coffee prices decreased dramatically, reaching lows of CNY 8 per kilogram. Not surprisingly, the combination of a natural disaster and price drop led to the loss of motivation from farmers and companies in the region. Many farmers decided to cut down their coffee trees and grow other crops like tea instead (G02, March 18, 2014).
Consequently, the area of cultivation suffered a drastic decrease. The lowest was reached in 2006, with only 7,800 hectares of coffee.
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After 2007, when international coffee prices started to gradually rise, Pu’er authorities declared coffee an important specialty industry fostered by the government. Moreover, in 2010, the government included coffee as one of the “Three Treasures of Pu’er”, along with Pu’er tea and the noble dendrobium orchid. These measures were aimed at increasing motivation among farmers and entrepreneurs to resume the fast development of the coffee industry. The response to this campaign resulted in an increase of over 4.5 times of the area cultivated from 2007 to 2010. Due to the growing government involvement, in 2012 Pu’er set up government institutions for the management of the coffee industry —the Pu’er City Coffee Industry Development Office— both in Simao district and in every county in Pu’er city.
These offices play an important role in the development of new guidelines and projects, the training in new techniques, and the promotion of local coffee.
Thanks to successful measures and government involvement, Pu’er is now the provincial and national leader in coffee production. In 2012, the total area cultivated in Pu’er surpassed 43,000 hectares, which accounted for Yunnan’s 47.18 percent and a 47.03 percent of the national total area. In terms of production, in 2012 Pu’er amounted for Yunnan’s 38.4 percent and China’s 38.28 percent. Most importantly, in terms of production value, Pu’er is responsible for Yunnan’s 50.42 percent and China’s 50.27 percent, more than half of the total output in both cases. By 2013, there were 118 registered coffee companies in Pu’er city, of which 12 were licensed to export. There were 153 peeling factories, 42 hulling factories and 3 secondary processing factories. The most famous local brands for coffee beans are Beigui, Arabicasm, Manlao River, Kefei and Livesun. For secondary processing coffee, the main brands are Aini, Beigui and Manya. Pu’er has even attracted two main Fortune 500 multinationals like Nestlé and Starbucks to establish permanent procurement stations and contribute to the development of coffee cultivation. Pu’er coffee industry employed a total of 247,500 people, of whom 244.000 are farmers and the remaining are workers in processing, purchasing and services (Pu’er Coffee Office, 2013, p. 9).
By identifying coffee as a unique local industry and with the support of new policies, funding and human capital training, Pu'er government has paved the road for the development of coffee production. The number of new coffee-related companies and factories is increasingly growing and more entrepreneurs are looking at coffee for new business opportunities.
Additionally, increasing numbers of farmers are entering the coffee market as a means to
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generate higher profits and provide a more stable source of income. Nevertheless, the rationale behind this fast development and the predictions for the future success of this industry are still undefined.
1.2. Purpose of research
For many decades, Pu’er has been known internationally for its famous tea. Such a unique local product gave popularity to the region and helped improve the lives of the farmers.
While Chinese coffee is yet far from achieving international recognition, this crop is increasingly significant for the local economy. If the fast growth of the past five years is sustained, it is plausible to presume that locally produced coffee will gain recognition and boost sales significantly. Considering that coffee production in Yunnan remains rather underdeveloped, an early analysis of this specialty industry could potentially help tackle the most problematic areas and identify the key elements for the successful take off of coffee growing, processing and branding in Pu’er. What is more, the early study of this booming business will help foresee the potential repercussions of an uncontrolled development of the coffee industry.
The aim of this study is to put in perspective and to analyze the different actors involved in the development of the coffee business in Pu’er. Through personal observation and extensive research, the following chapters will examine the motivations and interests of all actors involved —government, farmers, domestic companies and multinationals—, their goals and strategies, their role in the local coffee chain, and the potential setbacks they may encounter in the next years. The role and intentions of the government on fostering this industry will be the focus of attention.
The goal of this descriptive research is to set a solid base for future studies on coffee in the region, particularly from a social sciences perspective. By identifying and dissecting the main agents of development, this study will ease the task of allocating specific responsibilities and goals to each actor for the correct development of the coffee industry. This research will attempt to foresee areas of success, aspects in need of improvement, and potential threats to the environment and the industry. But most importantly, this research will serve as a significant English language source for the presentation and promotion of a challenging new industry in a region with great investment potential.
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1.3. Literature review
From the tree to the cup, the long journey that each bean takes is a reflection of the socioeconomic and political implications of the coffee trade. This path, the “coffee value chain”, is the basic unit of study for the analysis of this business, including the actors involved, the value added to the beans along the way, and the marketing strategies used to expand or shorten this chain. Thus, most literature on coffee economics and social impact makes use of the coffee chain as the axis of argumentation (Oxfam, 2002; Talbot, 2004; Petit, 2007; Tucker, 2011; Garza Treviño, 2014).
FIGURE 1: General structure of the global coffee-marketing chain.
SOURCE: Ponte, 2002.
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Talbot reviews different approaches to the structure of the commodity chain (2004, pp. 7-11).
Earlier, the chain was depicted as a dual unit that reflects both the hierarchical geographical structure of other commodity chains —poor peripheral countries that deal with coffee growing and initial processing— and the specific nation-state structure of the chain. Thus, this approach suggested that coffee trade is regulated within the producing countries, but under the limitations imposed by other nations located on the other end of the chain. A later review of the commodity chain distinguishes three dimensions: an input-output structure; a geographic distribution and a distribution among firms; and a governance structure. On the whole, the coffee value chain is a geographically differentiated process in which the role of all the states, firms, markets and consumers involved in the coffee trade determine the value, length and directionality of the chain.
Probably the main focus of analysis in recent studies is the new developments and changes in the traditional coffee value chain. These variations can be due to new demand or offer (specialty coffee, fair trade, organic), government intervention, or market and power forces.
Undoubtedly, for many decades now the main problem in the coffee value chain is the unequal distribution of incomes, reflecting the “asymmetrical character of power in the global coffee value chain” (Petit, 2007, p. 230). In other words, the traditional knowledge that coffee cultivation can help reduce poverty and improve the economies of the South has been challenged by recent changes in policy, market and technology, along with the constant risk of the coffee price cycle. It is in this new set of circumstances that farmers of developing countries become the weakest link of the chain, while importers, traders and consumers benefit from the change of balance (Oxfam, 2002; Talbot, 2004; Petit, 2007; Tucker, 2011).
Producing companies are now earning less than half of what they used to receive a decade ago; on the contrary, the value of sales in consuming countries in the early 2000s exceeded twice the value in the 1980s (Petit, 2007, pp. 230-231).
In the two decades between the 1960s and the 1980s, coffee saw a booming period. Authors indicate that the drastic removal of the quota system from the International Coffee Agreements (ICA) in 1989 resulted in the current instability (Talbot, 2004; Neilson, 2007;
Garza Treviño, 2014). Without the support of the ICA to raise and stabilize coffee prices, the market dropped and it led to the current status of instability and uncertainty due to continuous price cycles. Unequal distribution of incomes is the main root of this “paradox of coffee
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production” (Tucker, 2011, pp. 95-97). Although coffee is a relatively good source of income for farmers in many developing countries —or at least in comparison with other less profitable cash crops—, its price instability and unfair profit distribution generates a system in which farmers can not escape poverty, but neither can they abandon coffee for another crop after years of hard work and dedication. Some of the poorest and most inequitable countries in the world heavily depend on coffee trade. It could be then argued that coffee dependency, instead of providing a source of income and investment, is an anchor that impedes poor countries from further developing their economies through coffee export.
The high degree of volatility of this commodity manifests in the coffee cycle. These cycles are characterized by long periods of low prices followed by a shorter booming period. Tucker argues that this phenomenon is mainly caused by two factors: unforeseeable changes in coffee supply and the difficulty to match supply and demand (2011, p. 114). Demand and supply are difficult to match because farmers that plant new coffee trees motivated by growing demand and high prices will not harvest the cherries after at least three years. Unless external forces control the market, oversupply leads to the fall of prices, coffee surplus, and a loss of the capital invested by growers. Considering that prices tend to remain low for several years, farmers may encounter difficulties to repay loans and keep their land; eventually, they will cease the cultivation of coffee, leading to a massive decrease in supply and subsequent higher prices (Talbot, 2004, pp. 35-37). The impact of coffee cycles greatly depends on factors such as political strategies in producing and consuming countries, weather conditions, and social stability.
Finally, along with the unequal distribution of profits and the price cycle, coffee growers also face a decrease in coffee prices caused by the battle of prices among companies. In an attempt to lower costs while maintaining a consistent taste, coffee multinationals searched the market for cheaper suppliers that, undoubtedly, offered a product of lower quality. Farmers lowered the quality of their coffee in order to attract purchasers from all over the world. As a result, the general quality of coffee decreased considerably, reaching alarming lows in the 1960s (Talbot, 2004, p. 198).
Considering the aforementioned obstacles for coffee growers, in the past decades the industry has focused on shifting the coffee value chain, either changing the course of interaction between stages, adding new links, or removing old ones. Neilson argues that “product
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differentiation has allowed lead actors in the supply chain to construct entry barriers to protect their profit streams, shaping a new institutional environment, particularly with regard to the governance of quality” (Neilson, 2007, p. 189). The bulk of the current research on coffee industry explores these different alternatives to traditional coffee production that aim at improving the lives of farmers, reaching higher quality standards, and protecting the natural and social environment (see Taylor, 2002; Neilson, 2007; Petit, 2007; Bacon, Ernesto Mendez, Gomez, Stuart, & Flores, 2008; Garza Treviño, 2014). Talbot refers to this phenomenon as “forward integration” (2004, p.12): taking control over one of the links in the chain and increasing the share of profit in a stage by improving the quality and value in that stage. Among these innovations, it is worth mentioning the addition of new technologies, the production of new forms of coffee (selling green beans, roasted, grinded or instant coffee instead of just parchment), the focus on high quality specialty coffee, the promotion of brands and place-quality associations, and the introduction of new forms of cultivation that protect the environment and the rights of farmers.
It should be noted that many authors emphasize the importance of what Neilson refers to as
“turn to quality” (Neilson, 2007, p. 189). In other words, the current focus is to upgrade the standards of coffee and to create geographical associations to quality coffee. Brand and geographical association to quality are two main strategies to increase sales and ensure a steady supply. Product identity through “romantic place imagery” (Neilson, 2007, p. 189) or catchy slogans, product differentiation and product innovation are the main “rents” —profits resulting from changes in the chain— in the current coffee industry (Talbot, 2004, p.19).
After the coffee crisis and the sharp decrease in quality, many coffee consumers are willing to pay higher prices to drink coffee of higher quality. It is thus argued that this turn to quality and the production of specialty coffee are excellent ways to impulse the coffee industry.
However, not all authors agree with specialization. While most authors advocate specialty, fair trade and organic coffee as the means to raise prices, Petit (2007, pp. 254-255) argues that those alternatives present several limitations and, while they can be potentially successful in smaller quantities, the majority of coffee sold will still consist of non-differentiated coffee.
Therefore, in order to obtain greater profits in the sale of regular coffee, it is necessary to raise quality standards and consistency.
Fair trade and environmental-friendly coffees are the latest trends in adjustments of the value chain. While development agencies, NGOs and governments actively support the growth of
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these types of coffee, the opinions of scholars are divided. On the one hand, these sustainable initiatives are beneficial for aspects like environmental protection and health safety; increased incomes; improved education, health, and competitive skills “to face adversities presented in the current capitalist model” (Garza Treviño, 2014, p. 281); better infrastructure; management of production, storage and transportation; access to credit and networks; and increased self-esteem (Taylor, 2002). On the other hand, authors also show concern about the limitations of these practices and their potential to tackle social problems. The most raised question is that of certification (Taylor, 2002; Sick, 2008; Tucker, 2011. While certification ensures minimum prices and premiums, the process to obtain it can be very costly and time consuming, and certification can be revocable. Another problem is that fair trade and organic coffee is considered a niche product sold at very high prices, and thus it is targeted for upscale buyers.
The global market share of certified coffee was only around 1 percent in 2010 (Garza Treviño,
The global market share of certified coffee was only around 1 percent in 2010 (Garza Treviño,