THE PHILIPPINE COFFEE INDUSTRY

CLUSTER
INDUSTRY SNAPSHOT
Coffee plays an important role in the world economy, being widely consumed as the most prestigious
beverage. Coffee is the second most consumed beverage in the world (after water), and the second most
traded commodity (after petroleum), grown in some 70 countries, 60 of which are exporters.


It has been recorded that coffee has been around for more than 1,000 years. Its uses have evolved over
the years from its early uses as a food, a medicine, an aphrodisiac to a beverage to be savored and
enjoyed. Today, other uses and benefits have been discovered including cosmetics, contributions to
health and wellness, wine, and some unusual ones you just would not even think about. Not only do we
benefit from the bean but from the berry as a whole. The berry peelings are processed to fertilizer; the
used ground coffee can be used as skin moisturizer, anti-odor agent, stain and grease remover, hair
darkener and flea repellant.


Indeed, coffees popularity has grown through the centuries. Today, it can be safely assumed someone,
somewhere is savoring a cup, a mug or any of coffees delightful and delicious preparations at almost
every hour of the day. From sun up to sun down, its coffee time!


All commercial varieties of coffee are available in the Philippines Robusta accounting for 70% of the
countrys total production, and Arabica with about 5-10%. Other varieties such as Excelsa and Liberica
also thrives in the country and accounts for 15-20% of the total.

INDUSTRY SIZE, LOCATION AND GROWTH RATE
The International Scene


The biggest world producer is Brazil, which accounts for about 15% of the coffee global market. It is said
that most coffee imported in the United States comes from this country. After Brazil comes Vietnam,
which for the two consecutive years has placed itself in a second position, taking Columbias place.
Vietnam produces mostly Robusta, which is the cheapest coffee bean for importers. Then comes
Indonesia (with Java and Sumatra), Colombia (with its Colombian Milds, the best beans in the world,
according to coffee specialists, mostly known for Bogota, Medellin and Supremo) and ...another
surprise...India, taking Mexico's 5th place. India's most known beans are Mysore and Monsooned
Malabar.


The National and Regional Scene


Production:


According to the Philippine Department of Agricultures Bureau of Agricultural Statistics (BAS), total
coffee production declined slightly from 97,430 MT (dried berry basis) reported in 2008 to 96,433 MT last
year. The source said that the downtrend in coffee production of 1.02 percent was a result of prevailing
peace and order situation in Sulu and excessive rains during the flowering stage hampered harvesting in
coffee farms. In addition, production was affected by the low-buying price of coffee in Caraga provinces
as well as the continuous neglect of coffee farms in Cavite and Davao del Norte. In 2009, the total area
planted to all varieties of coffee dropped by 0.88 percent from 123 to 122 thousand hectares. Coffee
production in MY 2010 (which starts in July 2009) is projected to decline by 2-3 percent as a result of the
hot and dry weather conditions experienced due to the El Nino phenomenon.


The Philippines lies in a narrow area in the world called the coffee belt making it one of the few countries
that can grow four varieties of coffee: Arabica, Excelsa, Liberica and Robusta. The total number of
bearing trees dropped by 0.37 percent. The number of mature trees of Arabica went up by 0.16 percent.
Robusta remained the major variety with almost 72 percent share in the 2009 production.


Picking-Up from Increasing International and Domestic Demand


The Philippine Coffee continuous to adopt strategies that would increase production to take advantage of
the increasing demand both in the international and domestic markets.


Prospects are bright for special coffee varieties. Coffee drinkers around the world have been drinking
more specialty or gourmet coffee in recent years. The Department of Trade and Industry-International
Coffee Organization Certifying Agency reported a 130% increase in export value from P109 million in
2003 to P216 million in 2004. And the export momentum is here to stay as the demand for barako in the
Middle East and for Benguet arabica in the United States continues to climb. Export of soluble coffee to
Japan is also anticipated to prosper.


Similarly, prospects for the industry, in general, are positive. Farm gate price of dried coffee berries has
perked up to 30 per kg from 20 per kg. Prices offered to farmers are much better this year due to the
decrease in world coffee output. Production in major exporting countries such as Vietnam and Brazil has
gone down owing to the non-competitive wholesale prices in previous years.



With this encouraging scenario, now is the best time to revive the countrys coffee industry. To do this,
interventions must be implemented to address the major industry issues. Small farmers have been
discouraged by the low market prices of special coffee varieties in the previous years. Adding up to the
problem are the senile or unproductive coffee trees and poor technology utilization, resulting in short
supply.


Yet, domestic requirement is growing at 3.1% annually. At this rate, the estimated required output is
90,000 mt per year. However, current output level is only 28,000 mt. Coffee imports from Vietnam,
Indonesia, and Thailand are filling in the gaps while the local industry struggles to compete with low-
priced imports resulting from liberalized trade.



Thus, strategic science and technology (S&T) interventions estimated at P150 million have been set to
rehabilitate the existing Arabica, Liberica, and Excelsa coffee farms (11,000 ha) and to rejuvenate
3,000 hectares presently planted to senile trees. New areas (8,000 ha) in the Cordillera Region, Region 6,
and Region 12 will be planted to Arabica. Nurseries and mother clonal gardens will be established in
strategic locations.


Farmers will be trained to adopt improved coffee production technologies. Aggressive marketing will also
be done to promote Philippine coffee while market research will be implemented to study the industrys
options ahead. The interventions will increase the present yield level of 400 kg of coffee beans per
hectare to 800-1,000 kg. The increase in yield of coffee farms brought about by the S&T interventions and
the production in new areas will translate to about P1.36 billion worth of coffee beans per year. (DOST-
PCCARD)

MARKET OPPORTUNITIES


Coffee Market Channels


Mainstream market


The mainstream market includes importing countries such as the United States, Germany, Japan, France,
Italy, Spain, Canada, the United Kingdom, Poland and the Netherlands. It accounts for more than 85 % of
world coffee imports. In the mainstream coffee market, price is driven by supply and demand. A decade
of glutted coffee markets has pushed supply through the roof and driven the prices into the basement.
Efforts by industry organizations, such as ICO, to control supply and demand have failed as large
producers, like Brazil and Viet Nam, refuse to limit production.


Specialty coffee market


The term specialty was first used by the Norwegian coffee connoisseur and roaster Erna Knutsen in
1978 (Ponte, 2002). Specialty coffee meant that coffee beans from special geographic environments
provide specific flavor characteristics and should be protected in their identity. Since then, the term has
been broadened to encompass higher quality coffees, both single origins, i.e., estate coffees or blends
and unconventional coffees like flavored coffees. In addition, the use of the specialty coffee definition
differs from country to country. For instance, due to the fact that European countries drink more high
quality coffee than in the US, quality standards for coffee will be more stringent in Europe than in US
where the specialty coffee is a nascent industry. This happened as a response to poor quality offered to
consumers by roasters (Ponte, 2002). While price was the main business factor for the bulk market,
quality is the most important criterion in the specialty market and price premiums are offered for high
quality coffees.


Sustainable coffees


Sustainability has been defined as meeting the needs of the present generation without compromising the
ability of future generations to meet their needs (WCED, 1987). In the specialty coffee literature,
sustainability needs to meet two basic criteria (Giovannuci, 2001): protection of the environment and
social fairness. Social fairness refers to economic viability for farmers, focusing on institutions or contracts
that permit producers to be paid price premiums for a specific level of coffee quality (Ponte, 2002).
Sustainable coffees mean that these coffees are grown in ways that reflect the criteria of environmental
protection and socio-economic fairness. Within the specialty coffee market, three segments of sustainable
coffee have been developed even though there is no unique definition of sustainable coffees (Gionannuci,
2001). They are known as organic coffee, shade-grown coffee and fair trade coffee.


Organic coffee


Organic coffee is produced under a system that protects the soil fertility and biodiversity. It is based on
the use of agricultural practices that maintain and enhance the environmental ecology of the coffee field,
with little use of off-farm inputs. There are certification agencies that set up organic standards of
production, processing and handling organic coffee. However, the cost of the investment for the
certification is excessively high for most small producers.


Shade grown coffee


Also known as bird friendly coffee, shade grown coffee is grown under the shade of various types of
trees. The advantage of such types of coffee is that they offer a good ecosystem for birds and other small
forest animals. In addition, the system reduces soil erosion and/or water run off through mulching from
the trees. To be certified, shade grown exporters must first of all be organic.


Fair trade coffee


Fair trade coffee relies on partnerships between fair trade organizations also called alternative trade
organizations and producers associations or cooperatives. The fair trade movement was launched in the
Netherlands in 1988.


Although coffee was the first, most commonly fair-trade-certified product, other fair trade imports include
bananas, chocolate, honey, tea, sugar, orange juice and indigenous handicrafts. Fair trade coffee meets
several criteria. Growers must be organized into democratically run cooperatives. The cooperatives must
agree to independent inspections. They also must use sustainable methods of agriculture. In return, the
growers are guaranteed a living wage of at least $1.26 per pound for their coffee (15 cents more if it is
grown without pesticides).


Although fair trade coffee constitutes only 2 percent of the world's coffee supply, consumer demand for
fair trade coffee has grown over the years. Fair trade coffee is sold directly by small producers
associations or cooperatives to an importer or a fair trade organization, and the producer is guaranteed a
minimum price for his or her coffee. Unlike organic and shade grown coffee, the certification process for
fair trade coffee is not too costly for small producers


Trade


Coffee is marketed in different forms including the following: raw coffee beans, roasted coffee, extracts
and essences, and husks and skins. Data from the National Statistics Office show that imports of coffee
beans increased from 15,700 MT 2008 to 30,700 MT in 2009. Imports are sourced largely from
neighboring Asian countries such as Vietnam (54 percent); Indonesia (44 percent) and others. Imports of
soluble coffee and coffee concentrates increased from 13,960 MT in 2008 to 19,293 MT last year.



Exports of instant soluble coffee increased from 272 MT in 2008 to 408 MT last year. Majority of the
soluble coffee exported went to South Korea and Thailand. On the other hand, exports of roasted and
green coffee beans dropped from 2,870 kilograms in 2008 to zero.


With the growing domestic demand at an average rate of 3.1% annually and the big potential for exports,
without significant increases in coffee production, coffee bean imports will likely remain high at estimated
nearly 40 to 50 percent of total annual domestic requirement.


According to Euromonitor, specialty coffee shops in the Philippines are expected to continue growing in
coming years. Specialty coffee shops grew in terms of number of outlets, transactions and value sales.
With Starbucks gaining more popularity and other specialty coffee shops following suit, more such outlets
are likely to appear. The strong growth is mainly attributed to good consumer demand, as coffee drinking
has become a very popular social activity. Increasingly, Filipino consumers are settling for a good coffee
instead of alcohol on a night out. Coffee shops have become a status symbol for younger consumers.
Working people find these specialty coffee shops to be convenient places for afternoon business
meetings, and night escapades. With the growing popularity of coffee drinking in the country, Filipinos
have started to be more discriminating in their preferences for coffee, according to Euromonitor.


Multinational specialty coffee shops dominate local chains. Led by Starbucks, specialty coffee shops have
been enjoying robust growth since appearing in the late 1990s. Other popular foreign franchised
specialist coffee shops include Seattles Best, The Coffee Bean & Tea Leaf and UCC Coffee. Figaro
Coffee Company, the most popular local specialty coffee shop in the Philippines, was actually established
earlier than Starbucks in the country.



Market trends



Recognizing the good growth potential for specialty coffee shops, many Filipino companies and even
growers of locally produced coffee beans have opened their own businesses. The support of the local
government and agriculture sector has also helped to rejuvenate the Philippine coffee industry. Major
players in the instant-coffee segment include Nestl Philippines Inc., Universal Robina Corp. and San
Miguel Foods. In ground and brewed coffee, the significant local players are Figaro, Monks Blend, Caf
Amadeo, Batangas Brew and Cordillera Coffee. Nestle Philippines Inc., maker of Nescafe products,
reportedly supplies 85% of the instant/soluble coffee in the market. The remaining 15% is shared by
Commonwealth Foods (Caf Puro), General Milling Company (Kaffee de Oro), and Universal Robina
Corporation (Great Taste).

THE PHILIPPINES PRIDE SPECIALTY COFFEES


Alamid or Civet Coffee


Coffee Amadeo has popularized the very exotic alamid coffee. This world's most priced coffee was
made from the beans found in the droppings of the Philippine civet, a cat-like nocturnal mammal closely
similar to the mongoose. The beans, which are swallowed, digested, and passed out whole by the animal,
are gathered from droppings found at the farm. These beans are then filtered, dried under the sun for
several days and then roasted for 7 hours.


At present, Coffee Amadeo is focused on the joint production and consumption program of Philippine
coffee, rationalizing the supply chain and embedding Fair Trade principles to promote the Philippine
coffee industry's sustainability. It is focused on deploying community roasting business units (CRBU) all
over the country, most especially in the countryside, propelling local economies by having
different business models of retailing Philippine brewed coffee. It has established Community Coffee
Roasting Facilities in 12 locations namely:

General Santos, South Cotabato
Tublay, Benguet
Sagada, Mt. Province
Angeles, Pampanga
Mactan , Cebu
Bacolod, Negros Occidental
Peace & Equity Foundation Ofc., Loyola Height , Q.C.
South Supermarket, Alabang
Bote Central Head Office, Las Pinas - Alabang
Tanjay, Negros Oriental
Sultan Kudarat, Maguindanao
Impasugong, Bukidnon

Fair Trade also for Cordillera Coffee


With the increasing concern for food safety and health, consumers have correspondingly increased their
interest on where their food products come from. Market positioning has become a strategy for most
products sold to high-end markets but has penetrated the low-end as well. Food processors have
positioned their products as organic, imposing premium prices, and just recently, products are
developed as fair trade.


Most coffee farms in the Cordillera provinces are jungle types, and they depend much on available
nutrients contained in the soil and the environment, making the coffee produce organic by neglect.
Cordillera Coffee, a coffee shop owned by a Kalinga entrepreneur Mary Grace-Arboleda Young, is an
advocate of coffee fair trade. In 2005, Cordillera Coffee established Coffee AID (Assistance for
Indigenous Development), a non-government organization that promotes local coffee and local coffee
growers. Arboleda-Young explains why she began this initiative: "Coffee AID directly links our coffee
enterprise to about 100 farmers who grow and supply coffee beans. We pay premium prices to Coffee
AID farmers for our coffee beans, tea leaves, and other products. Benguet alone supplies us with 10 to 12
tons of coffee beans a year. Our staff is also involved in continuous training and volunteer programs for
the Coffee AID farmers to ensure the quality of their produce," says Arboleda-Young.

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