Coffee — VietEcon

AG EXPORTS ARE RISING, BUT FALLING AS A % OF TOTAL EXPORTS. SOURCE: WORLD BANK

Let’s go over a few truths:

PRODUCTION HAS GROWN TREMENDOUSLY, PRICES NOT SO MUCH. SOURCE:

Agriculture is a very important export earner for Vietnam. I saw it in the US, where Vietnamese shrimp and other products are big sellers.
At the same time, it’s importance has diminished. We can see that in the percentage of exports that come from agriculture, which have fallen from 33% of total exports as early as 1997 to just 14% in 2017 (and undoubtedly more in the past two years).
We see the same thing in terms of employment. The percentage of the population working in agriculture has fallen across ASEAN, but no more than in Thailand and Vietnam. The percentage is down c29 percentage points since just 1991.
Despite the fall, except for Laos, Vietnam is the ASEAN country with the highest percentage still employed in agriculture (40%). This means that agriculture prices are extremely important for rural Vietnamese.
Coffee is an important crop in Vietnam. Production has increased by a CAGR of 12% since 1990 from 79,000 tonnes to 1.8 million tonnes in 2018. It makes up more than 2% of national GDP.
Prices have not grown that much, in fact, they grew just 2.5% annually in USD-terms over the same period. This is probably just below inflation in the US and well below inflation in Vietnam (although this is somewhat offset by the depreciation of the VND - in VND terms, growth is much more).
The last year was not good for coffee production (which fell). And also bad for prices (which also fell).
You can see the US retail prices in the chart to the right - they are definitely falling. The three main buyers of Vietnamese coffee are Germany, the US and Italy.
Prices are likely to fall more because of increased production in Brazil, and the lower real. Coffee prices to growers have fallen consistently over the past two years. In May 2017, Brazilian Naturals (whatever that is) fell from above $1.25/lb to just over $1.00. That’s a massive decline.
The real has come back a bit over the past year, but with a new regime, there is a good chance it will fall again. Plus production in Brazil is increasing. According to the International Coffee Organization, “For October 2018 to April 2019, shipments of Brazilian Naturals increased by 18.5% by 24.86 million bags, and exports of Colombian Milds grew by 8% to 9.07 million bags.”
We are seeing the impact of these lower prices in the number of Central Americans coffee growers that are abandoning their farms to try to cross to the US. This Washington Post article makes a good case that a large number of coffee farmers have fled.
There are more than 640,000 small holders that farm coffee in Vietnam, and I would assume that these farms support 3-4x as many people, so we are looking at c2.0-2.5m people that are supported by coffee in Vietnam. And it could be much more.
The government and the private sector are trying hard to move up the coffee value chain from Robusta to higher-priced Arabica beans.
At the same time, climate change has not been and will not be good for Vietnamese coffee.
As coffee prices fall, it is going to be more and more important for the government to come up with a plan. On May 23, 2019, I talked about how some coffee farmers are trying to replace coffee plants with avocado trees. These sorts of things probably needed to happen 2-3 years ago. If there is no solution, Vietnam will likely see a big migration from the highlands into the city of farmers with no other skills, just like we are seeing in Central America.

If you want to know more about the history of coffee farming in Vietnam, here is a very interesting article about the growth of Robusta coffee in Vietnam. It was driven by government policy and mass migration of Vietnamese into the Central Highlands, displacing some ethnic minorities.