A single marketing arm for coffee – the reality

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A VISION was floated at recent meetings in Goroka by a well-meaning academic. The meetings were reported by Zachary Per in The National on Friday, Oct 2. The advocate for a single coffee-marketing organisation received his listeners’ plaudits because he spoke to people who heard what they wanted to hear. It was an emotional response rather than one based upon any prior reflection or knowledge of the reality. PNG’s coffee-entrepreneurs at large remain ignorant of the way their market works. And, as it appears, so does Prof Chalapan Kaluwin, even though he was in a good position to consult other academically-qualified Papua New Guineans who do know, before speaking.

In spite of attempts over the years by CIC to explain to local entrepreneurs and to small growers, just how the market works, most of these people are puzzlingly ignorant of the truth even though some of them have invested large sums in their coffee-based enterprises.Aside from running week-long training courses for factory-owners and others interested in maximising both price and quality for their own benefit, CIC has printed and widely distributed more than 40,000 copies of a Tok Pisin booklet entitled Stori Bilong Kopi.

This well-illustrated publication, which was also sent to all 109 Members of Parliament and to all high schools, explains the whole system in simple, easily understood terms.
Anyone at all with knowledge of simple arithmetic and a calculator is enabled by this booklet to work out the fairness or otherwise of the prices being paid for coffee in the main Highlands towns on a daily basis, and to understand questions of crop financing and what happens to our coffee in the consuming countries as well.

It is true to say that small farmers all over the world are inclined to believe what they want to believe.It is also true to say that the greatest boost to profitability through more efficient marketing is created by giving farmers the best possible physical access, and information-based access, to their market.In other words, by giving them properly-maintained road access and telephone or media access to daily market reports.

The way towards improving rural cash income in PNG is simple and within the ability and the purse-strings of big government, but it is ignored in the same way that improving rural health and rural education and policing services are ignored.

In place of simple, common-sense plans and the exercise of discipline over those entrusted with implementation, we see an everlasting parade of “new” development strategies, task forces, 20-year plans, etc, all with the requisite major conferences and seminars held in comfortable surroundings.

Venues for people making “names” for themselves with no intention of taking responsibility and facing up to big tasks.

None of these plans have made a significant difference in recent decades, a time which has seen a falling-off of economic and physical welfare in most of the population.
The secret to rural well-being and prosperity in PNG is simple: it is roads, roads, roads.

Roads mean not only access to markets, but also to health and education services, police patrols, agricultural field workers and school and village court inspections, all to reach rural areas and establish themselves as part of daily life, to the people’s great benefit.

I know Huk Avute and many of the others addressed by the professor, and I am sure they will recognise my name and the fact that I am not one who speaks outside my own sphere of experience.

The truth about the coffee market, as I have previously written, is that the biggest slice of the ultimate total retail selling price for coffee is appropriated by the roaster-marketers, the major brand proprietors and their distributors in the coffee-consuming countries.

The five largest international brand-name owners – namely Nestle (largest), Kraft, Sara Lee, Folger and Tchibo – four of them are American – draw more than half of the world’s total output of green coffee beans into their operations each year.

This means that they have a huge influence over the way the market in consuming countries works.

All medium- and small-volume roaster/packagers follow this lead.

These are the middle-men who hold down both the coffee growers’ interest and that of the coffee-drinker.

Neither side has ever been able to break this grip.

Even the feel-good NGO-related and “fair trade” “organically certified”, ”rainforest-friendly” and “coffee connoisseur” marketing organisations follow suit – their share of the total retail value of the coffee they sell is far in excess of what linked growers may expect to get, even when their grower bonuses are included.

This fact can be ascertained simply by comparing the daily New York C-contract market average for Arabica with the advertised price for a kilo of “fair trade” or “organic” coffee as sold on the internet by the NGOs and others involved in this trade.

In Australia, and expressed in kina terms, these agencies are getting up to K80 per kilo for their roast-and-ground certified product, where the “registered and certified” supplying small grower in PNG will be very lucky to get K6 for enough good dry parchment to make a kilo of roast and ground.

While it is possible for growers to obtain worthwhile increments over the ordinary daily price paid at the factory door by forming a properly-organised marketing group and selling by competitive tender, no one has yet managed to get such a system running on more than a small scale.

Nevertheless, such an organisation is still in the same boat with all other growers, factory-owners and exporters; no one is able to break out of the grip established by the major roasters of the world.

The same market conditions hold true for any large-volume agricultural commodity.

Any economist will explain this in detail.

Copra, rubber, rice, wheat, meat, processed fruit juices, milk powder, cocoa, tea, sugar – all these are traded in complex markets where the big brand-owners and processor-marketers keep the major share for themselves.

A loaf of bread will sell for anywhere between A$1.80 and A$4 depending on its type and quality in Australia right now.

But the Australian wheat-grower will get only a few cents a kilo for his product.

It’s a situation which it is easy to be resentful about, but it is a system which is not going to respond in any favourable way to a single-entity coffee marketing organisation in PNG.

Beyond this, there are many things to think about, for instance:

The annual crop harvested in PNG needs an input of some K460 million to finance it.

This has to be borrowed overseas, and exchange-rate fixation and coverage are very important.

This is what the present registered exporters do, using their networks of overseas contacts.

They then funnel the money out to factories on the basis of contracts to supply, and thus it passes on to buyers and eventually to the growers.

All these overseas financing linkages will have to be replaced if a single entity is to be empowered to trade all of PNG’s coffee each year.

Coffee for export must be re-processed by the exporter even though it has been milled and bagged in registered factories.

There are often discrepancies and too many defects in coffee delivered from factories.

The reprocessing and warehousing facilities of the current exporters could perhaps be purchased to physically handle the coffee as it comes in from the factories, but they are relatively small and spread around so management would be very tricky indeed.

On the other hand, a single assembly and re-processing establishment would be hugely expensive to build.

The record of single-entity or central marketing agencies elsewhere in the world is not good.

In the case of Kenya, which people in PNG are most familiar with, the industry was set up based on co-operative mills selling through the Coffee Board of Kenya, but after years of falling quality and major accounting problems, the system has been altered drastically to allow private exporting.

The main problem encountered in the central marketing period was delays in decisions and paperwork, corruption, and a creeping expansion in the size of the staff.

There was much wheeling/dealing, for instance in the awarding of cartage and supply contracts.

Would this be PNG’s experience also?

In the short history of PNG’s coffee industry, a large number of registered coffee-exporting companies have gone bankrupt and closed down.

Not just little ones either. You must have a very short memory if you don’t remember the major disaster of Angco Ltd’s public humiliation and closure due to debt a few years ago.

Angco was the largest and longest-established of all the exporters.

Then there was Coffee International Ltd, the second-largest exporter, put into receivership by its bankers a decade ago.

Cofex Ltd, another mid-sized, well established and reputable company with good overseas connections also ceased to operate back in the 1980s.

These companies were established, well recognised and had good overseas connections.

In the end, however, all succumbed to the pressures of a very complex financing and trading business.

It is easy for those who have acquired superficial knowledge to talk about the coffee industry as if they have solutions which no one else has thought of, but these people are not helping the growers.

They are harming them, as well as the industry at large, by raising unrealistic expectations which work against the spread of a rational and factual understanding, and thus of the growth of industry-wide cooperation in the search for meaningful remedies for the problems the industry faces.

Source: John Fowke

* John Fowke spent nearly four decades working in PNG’s coffee industry. This is the first of a two-part article.