Vietnam - Coffee businesses face difficulties with speculation, competition

Domestic coffee businesses continue hit snags as farmers still speculate products and sell them based on rumours.

Speculation for high prices

In mid-March, the International Coffee Organization (IOC) warned that the amount of coffee in storage in exporting countries has fallen to 17.4 million bags in the 2011-2012 crop, the lowest level that the organization has ever estimated.

In Vietnam, the price hikes for coffee has encouraged export activities and reduced supply sources. In the meantime, decreases in price in some specific periods have led farmers to speculate their goods and wait for a higher price.

IOC said the lack of coffee supply from Vietnam will drive up the price, which will make Vietnamese farmers continue to store the products.

In fact, the price of unprocessed coffee beans in the Central Highland provinces including Dak Nong, Dak Lak and Lam Dong recently increased VND100,000 per tonne to hover around VND39.7 million, and even hit a record high of VND40.4 million-VND40.5 million since the beginning of 2012.

Unhealthy competition

According to the Ministry of Agriculture and Rural Development (MARD), Foreign Direct Investment (FDI) businesses have accounted for 50 percent of total coffee output in Vietnam, equivalent to 600,000 tonnes per year.

These figures show that FDI businesses have dominated the total volume of exported coffee in the country.

To develop its more than half a million ha area specializing in growing coffee, Vietnam had to pour tens of trillions of VND into infrastructure development, irrigational works and scientific research.

In addition, with the home ground advantage, domestic businesses should be able to compete with FDI businesses. However, they are inferior to the FDI businesses.

According to Luong Van Tu, Chairman of the Vietnam Coffee-Cocoa Association (Vicofa), with larger capital capacity and a wealthy of market experience, FDI businesses are easy to defeat domestic businesses right on the home turf.

Most coffee businesses in the Central Highlands are finding themselves in a difficult position to continue their operation and many of them are on the brink of bankruptcy.

The VND1,600 billion debt of Vinacafe Buon Ma Thuot is a typical case in point in coffee businesses’ loss due to their failure to purchase materials.

Nguyen Van Tam, Vinacafe Buon Ma Thuot’s Head of Business Department, said every year, the company buys 100,000 tonnes of coffee beans, but just less than 20,000 tonnes has been purchased this year.

It is clear that when FDI businesses have a lion’s share of the market, domestic businesses cannot compete with them and have to buy materials from them to maintain their production.

In addition to a lack of capital and high interest rates on bank loans, domestic businesses’ failure can be attributed to the loose legal framework in issuing and controlling the granting of permits for FDI businesses, which results in bending the law and non-transparent competition.

Domestic businesses have not yet associated themselves in mobilising capital and and improving operational methods to facilitate their purchase of materials. They tend to operate on their own and therefore cannot compete with FDI businesses.

Farmers usually sell their coffee to those who pay them more. Therefore, FDI businesses with higher capital can easily purchase more materials.

To compete with FDI businesses and create a transparent business environment, domestic businesses need to consolidate mutual trust between them and farmers, thus, helping them stabilizes their businesses operation and farmers avoid the danger of makeshift living.

VOV

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