THE IMPACT OF COFFEE

PRODUCTION ON NEPALI
SMALLHOLDERS IN THE
VALUE CHAIN

by
Rishi Ram Kattel

Supervisors:
Prof. Dr. Ulrike Grote
Prof. Dr. Dieter M. Hörmann
Prof. Dr. Bernhard Hau

Financial support by DAAD is acknowledged. Final Thesis Defence

IUW 1
24th Sep. 2009
 Outline

 Problem Statement

 Review of Literature

 Research Objectives

 Conceptual Framework

 Methodology

 Results

 Conclusions
 IUW The Facts of Nepali Coffee
• The agricultural sector is the backbone of
Problem Nepalese economy
Statement Coffee farming on the
38% share GDP
foothills of the Himalaya.
2.8% annual growth rate,
Literature 66% labor force (employment). Photo: Field survey, 2008.
Review

Research • Coffee share: 7.3% share in country‘s total 15%

Objectives
agricultural export share.
Conceptual
Framework
• Annual growth rate: 35% coffee production
Methodology and 25% production area.
Results

Conclusions
• Coffee production: in 33 districts out of 75
(altitude: 600 – 1600 m)
• High quality specialty coffee

Key market players in Nepal:

Coffee Farmers 12,800

Pulper operators 200
Processors /Marketers 9
Exporters 4
3
 IUW
Development of Nepali
Comparision Coffee
of Nepali Coffee Sales, 2004
Sales, 2004 to to 2007
2007
Problem
Statement 120
114

100
Literature Green Beans in Metric Ton 80
Review 80
66
Research 67 International
60
Objectives Market
37 Domestic
Conceptual 40 40
Framework Market
34 37
20
Methodology

Results 0
2007
2004 2005 2006
Conclusions Fiscal Years

Total Green Beans Marketed: 181 MT (in 2007).

1. International Market: 63%; Japan (55%), Europe (34%), USA (3%) &
other countries (8%)
2. Domestic Market: 37%
(Source: CoPP/Helvetas,
2007 ) 4
 IUW
Major Problems in Nepali Coffee Sector
Problem
Statement
• Lack of Research: to analyse the impact of ‘Group Organic
Certification’ on the livelihood strategies of Nepali
Literature smallholder coffee producers in the value chain.
Review

Research • Lack of marketing strategies.

Objectives

Conceptual
• Low economies of scale in production
Framework

Methodology
• Nepali coffee sub-sector underdeveloping in the value
Results chain: quality? value chain upgrading?
Conclusions

Need to identify and recommend upgrading strategies.

5
 IUW
Literature Review: Value Chain
Problem Technology
Statement Production Input Production Processing Marketing Consumption
Supply
Literature
Process
Review Component of general value chain.

Upgrading means that individuals, firms or even a whole

country improves its original situation through “Changes in the
Research
nature and mix of activities, both within each linkage in the
Objectives
chain, and in the distribution of intra-chain activities”
(Kaplinsky & Morris, 2001, p.38).
Conceptual
Framework
Types of upgrading at producers’ level:
Methodology
1. Product upgrading:
Results improving the product quality.
2. Process upgrading:
Conclusions
improvement of process efficiency (e.g. wet processing at farm)
3. Function upgrading:
new process form e.g. roasting of coffee
4. Chain upgrading:
adding a new value in chain, investing product diversification with fruits
(coffee with cocoa or fruit crops as shade trees) or possibilities of changing
buyers in the value chain system.
( Source: Humphrey & Schmitz, 2000)
6
 IUW
Past Empirical Research Findings
Problem
Statement
 The specialty coffee segment has been growing at an annual
Literature
rate of 5-10% in the world market (Lewin et al., 2004).
Review
 Cooperatives play an important role in enabling farmers to
access specialized markets (Blackman et al., 2005).
Research
Objectives
 Strong coordination between development organizations and
Conceptual
coffee producers‘ cooperatives have increased smallholders
Framework
status (Fromm & Dubon, 2006; Honduras).
Methodology

Results  Farmers’ access to relevant information and marketing

assistance is expected to have a positive influence on
Conclusions marketing performance (Poole, 2000).

 Entry barrier in coffee marketing: “low quality” and “low level

of product and process efficiencies” (Oxfarm, 2005; Calo & Wise,
2005).

 Consistence quality of the coffee is most important factors to

be competitive in markets (Lewin et al., 2004).
7
 IUW
Major objective:
Problem To examine the impact of coffee production on Nepali
Statement smallholders’ livelihoods taking their integration into
Literature value chain into account.
Review

The specific objectives are:

Research
Objectives 4. To assess the differences between certified and non-certified
Nepali coffee farmers.
Conceptual
Framework
6. To understand the function of the Nepali coffee value chain and
investigate whether certification scheme offers additional
Methodology benefits to the smallholder coffee producers.
Results
8. To assess major entry barriers of Nepali coffee in the international
Conclusions market.

10. To identify the determinants which lead farmers‘ decision to

adopt process upgrading at farm and to investigate whether this
decision provides higher annual household income from coffee
sector.

8
 IUW

Problem Coffee With Without

Statement Producers Certification Certification

Literature
Review

Research
Objectives Production System
Chain Performance:
Type of contract Efficiency: Input & Output
Conceptual Marketing condition Organizations
Framework Coffee quality

Methodology
By whom ?? By whom ??
Results
Marketing
Conclusions
Chains

International Domestic
Market Market

Conceptual Framework. Source: Own illustration

9
 IUW
Gulmi District Kavre District
Problem Certified: 60 HHs Non-certified: 60 HHs
Statement Marketing: Cooperative Marketing: Company

Literature
Review

Research
Objectives

Conceptual
Capital
Framework

Methodology

Results Study Area

Conclusions
Major coffee growing districts
Other coffee growing districts

10
 IUW
Research Methodology
Problem
Statement
 Survey Method: Purposive selection of districts and villages and
Literature random sampling of smallholder coffee farmers.
Review

Research
 Survey Techniques:
Objectives

Conceptual
1. Coffee producers’ survey: Semi-structured interviews with 120
Framework HHs ( i.e. 60 in each district).

3 villages were selected in each district according to the criteria:

Methodology (a) altitudes (<850 m, 1000-850 m & > 1000 m)
(b) smallholders: All are small-scale coffee producers (< 1 ha)
Results
2. Focus group discussions: total 6 (8-10 smallholder coffee
Conclusions producers per group).

3. Expert interviews with: a cooperative in Gulmi, 2 District Coffee

Producers’ Associations, 3 traders.

 Methods of Data Analysis: Descriptive statistics, LOGIT and OLS

regressions.
11
 IUW Descriptive & Comparative Statistics:
Variables Total Average Certified Non-certified t-test,
Problem (N=120) (n=60) (n=60) X -test
2

Statement
Continuous: Mean SD Mean Mean t-value
Literature Education (years) 6.3 4.64 7.3 5.2 2.674***
Review
Experience of coffee cultivation (years) 9.2 5.85 9.8 8.6 1.139

Research Adult HH members (number) 4.4 2.02 4.6 4.1 1.355

Objectives % of shade trees cover 57.2 29.88 50.7 63.8 -2.457**

Conceptual Yield of coffee in 2007 (qq/ha) 24.5 22.91 20.7 27.8 -1.844*
Framework Income from coffee (Rs.) 6,056 9,111 6,140 5,966 0.103
Dummy: % % % X2 -value
Methodology
Gender (male =1) 58 52 65 2.194
Altitude (>1000 m =1) 28 27 30 0.164
Results Wet process upgrading (yes=1) 33 25 40 3.077*
Training received (yes=1) 64 70 58 1.331

Conclusions Membership (yes=1) 24 33 15 5.502**

Book keeping (yes = 1) 31 43 18 8.792***
Access to credit (yes=1) 42 38 45 1.739
Trust (yes=1) 38 45 32 2.256
Shocks (yes=1) 47 72 22 30.134***
Poor (< US $ 1.25 =1) 34 40 28 1.815

*** significant at 1%; **significant at 5%; *significant at 1% levels. 1 US $ = Rs. 71.06

12
 IUW

Problem
F: 8.923*** F: 2.480*
Statement
a a
(32.2)
Literature (33.2)

Review
ab
(23.3)
Research
Objectives b
(20.2)

b
Conceptual (13.3)
b
(11.4)
Framework
( ) : mean
Methodology
F : F-test

Results

Conclusions

Variables (N=120) Low alt. Medium alt. High alt. F-test

Yield (qq/ha) 20.4 b 20.9 b 32.8 a 4.502**
Income from coffee (Rs.) 4,605 b 4,876 b 9,206 a 2.972*
***significant at 1%; **significant at 5% level; *significant at 10% level. Here, 1 US $ = Rs. 71.06
Different letters a, b indicate significant difference of mean ( α = 0.05 ).
13
 IUW
Nepali Coffee Value Chain: Two Districts Investigate
Problem
Statement
Input Suppliers
Literature
Review

Research
Objectives Certified Farmers Non-certified Farmers
Conceptual
Framework 45% Pulper Dry Parchment
Dry Cherry (90%) Operators (20%)
Methodology Dry Parchment (10%) Filter Coffee
(2%)

Results Cooperative Companies

(Certified) (Conventional)

Conclusions 65%
90%
Wet processed Green
30% wet processed GB Domestic Market Beans (GB) only
70% unwashed GB/RB

International Market

14
 IUW
Organic Certification
Problem
Statement
What are the major benefits from certified organic coffee production?
• Price premium ?
Literature • Other benefits? Farm gate
Review Price Premium:
Research Price premium 20% in per kg FC
&
Objectives
6% in per kg DP
Conceptual Price (2007/008) Certified Non-certified t-test
Framework
Fresh Cherry (Rs./kg) 30 ($ 0.42) 25.08 ($0.35) 11.195***
Methodology Dry Parchment (Rs./kg)
(CR 4:1) 160 ($ 2.25) 151.19 ($2.13) 5.817***
Dry Cherry (Rs./kg)
Results
(CR 3:1) 60 ($ 0.84) Not sales
Ground Coffee (US$ /kg) No premium
Conclusions (CR 7.5:1) 300 ($ 4.22) 300 ($ 4.22) (domestic market)
Green Beans (US$/kg) Premium for
(CR 6.6:1) 640 ($ 6-12) 426 ($ 4-8 ) cooperative (export)

***significant at 1% level
Note: CR: Conversion Ratio of Fresh Cherry to processed form.
FC for Fresh Cherry Coffee and DP for Dry Parchment
US $ 1 = Nepalese Rs. 71.08 (in 2007/008) 15
 IUW
Other benefits from certification
Problem
Statement Benefits due to: Index % Rank
Literature Price security 3.36 38.4 I
Review
Easy to sell/market guarantee 2.79 19.7 II
Research
Objectives Environmental benefits 2.76 19.4 III
Conceptual High price per unit 2.07 14.6 IV
Framework
Better coffee quality 1.64 5.6 V
Methodology
Diversified income sources 0.90 2.2 VI
Results
*n = 47
Note: Benefits from certification.
Conclusions
(The scale values considered: 4 for very high and 1 for very low)

Source: Questionnaire results-from ranking matrix and importance of

index (from certified respondents)

16
 IUW
Findings from Expert Interviews & SWOT Analysis
Problem Export requirements:
Statement • Variety: Identification is necessary
• Supply continuation of high quantity
Literature
Review • Quality consistency
• Specialty coffee
Research
Objectives
Major entry barriers to export: Marketing Chains:
Conceptual
Framework Certified Non-certified

Methodology 1. Consistency in quality High High

2. Quantity supply High High

Results 3. Relationship with buyer Medium Medium

4. Certification of origin Low High
Conclusions 5. Initial qualification High - Medium Medium
(related to product & process upgrading)
Thus, quality inconsistency and low quantity supply are major barriers to
entry for both chains in the international market.
Note: Degree of barrier to entry: High, Medium and Low to the exports.

17
 IUW
1. Logit model (to determine the farmers‘ decision to adopt process
upgrading)
Problem
Statement

Literature  Pi  n
Yi =1; P (Yi = 1) = Pi
Review Li = In 
1 − P
 = Z i = α + ∑ β i.x i + ε i
 i  i=1 Yi =0; P (Yi = 0) = 1-Pi
Research
Pi = E (Y = 1/x)

Yi= f ( βi xi )
Objectives
= f (Gender, Education, Adult, Poor, Production, Training, Trust,
Conceptual Credit, Book, Certified) ---------Equation (1)
Framework

Methodology Yi (PROCESS upgrading at farm) = a dichotomous dependent variable

(1 if farmer sells dry parchment after wet processing, 0 otherwise)

Results 2. OLS regression (for determinants of annual HH income from coffee sector)

Conclusions InY COFFEE = α + β1. Age + β 2 .Experience + β 3 . Adult +

β 5 . Pr ocess + β 5 .Member + β 6 .Service + β 7 . Altitude +
β 8 .Shade + β 9 .Yield + β 10 .Shock + β 11 .Certified + υ i
--------- Equation (2)
InYCOFFEE = Annual HH income from coffee sector in 2007
(In Natural log form)
Source: Gujarati, 2003
18
 IUW
Logit regression results:
[farmers’ decision to adopt process upgrading, Yi =1]
Problem
Statement
Variables ( N= 120) Coefficients Robust S.E dy/dx #

Literature
Gender (male = 1)) 0.451 0.719 0.079
Review
Education (years) 0.110* 0.060 0.019*
Research Adult (number) 0.094 0.183 0.016
Objectives
Production (qq) 0.162 0.141 0.029
Conceptual Book keeping (yes = 1) 1.759** 0.878 0.356**
Framework Credit (yes = 1) 1.421** 0.587 0.266**
Trust (yes = 1) 2.119*** 0.627 0.410***
Methodology
Training (yes = 1) 1.196** 0.636 0.194**
Poor (< US $ 1.25/d/p = 1) -0.441 0.653 0.076
Results Certified (yes = 1) -2.466*** 0.716 0.429***
Constant -4.239*** 1.151 -
Log likelihood = - 44.27 Wald test (10) = 42.02*** (Prob > Chi2=0.000) Pseudo R2 = 0.41
Conclusions

Goodness-of fit test = Pearson Ch2 (109) = 88.19; Prob > Chi2 =0.9286
Area under the ROC curve = 0.8990
Overall corrected prediction = 82.05%

*** significant at P = 0.001; ** significant at P = 0.05; * significant at P = 0.10.

Model : Logit Regression. # Marginal change of probability (after logit).

19
 IUW
OLS Regression estimates:
[for determinants of annual household income from coffee (in natural log)]
Problem
Statement Variables ( N= 117) Coefficients S.E t-value
Literature (Constant) 5.991*** 0.458 13.06
Review Age (years) 0.002 0.006 0.42
Research Experience (years) 0.059*** 0.014 4.14
Objectives Adult (number) 0.020 0.040 0.51
Conceptual Process upgrading (yes=1) 0.622*** 0.186 3.34
Framework
Member (yes=1) 0.499** 0.197 2.54
Methodology Service (yes=1) 0.161 0.228 0.71
Altitude (>1000m =1) 0.494** 0.191 2.58
Shade cover (%) 0.010*** 0.003 3.28
Results
Yield (qq/ha) 0.015*** 0.005 3.17
Shock (yes=1) -0.969*** 0.200 -4.83
Conclusions
Certified (yes=1) 0.061 0.193 0.32
R-square = 0.67 Adjusted R-square = 0.63 F-value (11, 105) = 19.42***

Heteroscedasticity: Chi2 (1) =0.55; Prob > Chi2= 0.4586 (Constant variance)
VIF = 1.31 (mean): None of the independence variables > 1.65 VIF (No multicollinearity)
Model has no omitted variables (ovtest ): F (3, 102) = 0.46; Prob > F = 0.7107

*** significant at P = 0.001; ** significant at P = 0.05; * significant at P = 0.10.

Model : Linear Regression
20
 IUW

Problem

2
Statement

Literature
Review

1
Research
Objectives
Residuals

Conceptual
0

Framework

Methodology
-1

Results
-2

Conclusions
6 7 8 9 10 11
Fitted values [Coffee income (Log)]

Residual – versus - fitted plot (rvfplot):

Randomness of the estimated errors

21
 IUW
Summary and Conclusions
Problem
1. Differences between certified and non-certified farmers:
Statement Significant factors: education level, yield, shade, process upgrading,
membership, documentation and shocks.
Literature Non significant: gender, experience, income from coffee
Review

Research
2. Value chain analysis and impact of certification:
Objectives The major actors in Nepali coffee value chain: input suppliers,
smallholder farmers, pulper operators, cooperative and private
Conceptual companies.
Framework Benefits from certification:
- a passport to entry international markets
Methodology - price premium: 6 -20% for the certified smallholders.
- farmers experience environmental benefits.
Results
3. Major entry barriers to the international market:
-inconsistency in quality and low quantity supply

Conclusions
4. Results from regression models:

Results from the logit model: (decision to adopt process upgrading)

Significant factor (+): Level of education, book keeping, training
received, access to credit and trust. However, certification dummy (-)

Results from the OLS regression: (smallholders’ income from coffee sector)
Significantly factors (+): experience, yield, process upgrading, 22
 IUW

Problem Recommendation
Statement

Literature  Investment should be made in product and process

Review upgrading by improved production management
through extension and research and investment in
Research wet process upgrading at farm level according to
Objectives
altitudes.
Conceptual
Framework

Research
 Finally, significant factors from LOGIT and OLS
regressions models have to be considered in
Methodology designing strategies aimed at improving livelihood
status of smallholders.
Results and
Discussion

Conclusions

Recommendation

23
 THANK
YOU
FOR
YOUR
ATTENTION !!