Coffee is one of the world’s most widely traded commodities. And going by official figures, India too seems to have gathered a fair amount of expertise in its trade! What’s more? Despite the ongoing slump in overall exports, the country managed to ship out 63% of its production last year and a significant part of that to Italy, the Mecca of coffee! The Dollar Business explores the ways and means to catapult India into becoming a force to reckon with in global coffee trade.
Shariq Ahmad Khan | November 2016 Issue | The Dollar Business
A hot cup of coffee is what many people in the world begin the day with. And not without reason, the caffeine content in the beverage stimulates one’s mind and prepares one to face the day with what the french call joie de vivre [a delight in being alive]. Coffee is an immensely popular beverage across the globe, and has a fascinating history. According to the National Library of France, the earliest documented reference of coffee can be traced to 875 AD! It is believed that in the olden days, coffee was grown exclusively in Ethiopia from where it gradually made its way to the Arabian Peninsula. Thereafter, coffee farming continued to spread far and wide, and today it is farmed in more than 50 countries across Central and South America, Africa and Asia. Variety is the essence as far as taste is concerned – coffee can be heavy or full-bodied, mild, bitter or sweet.
Coffee is big business, and we are not just talking about the ubiquitous cafes. As per estimates, over 100 million people are currently engaged in coffee production and processing. Interestingly, US is home to the world’s largest number of coffee consumers, yet produces coffee only in small quantities. In fact, most of the coffee production takes place in the middle of the world – along the equator and in the subtropical areas. The warm, humid climate in this belt is perfect for coffee plantation. In other words, the global trade flow of one of the most “valuable” commodities in the world is currently directed from the less privileged (or not so rich) countries to the more privileged (or rich) ones. The revenues generated thereof are contributing to alleviate poverty and improve living standards in these exporting countries, thus helping reduce the global economic inequality – a noble cause served by a commodity, you would agree!
Coffee is not native to India. Legend has it that the 17th Century Indian sufi saint Baba Budan had smuggled seven raw coffee beans out of Yemen while returning from his pilgrimage, and planted them on Chandragiri Hill (now named after him as Baba Budangiri) in the Chikkamagaluru district of Mysore. This was the first ever coffee plantation in India, and all that subterfuge because the Arabs exercised strict control over coffee exports and had banned coffee beans to be exported to other lands in any form, other than the roasted or boiled, to prevent germination. That is legend, but India today is home to a wide range of coffees, 13 distinct varieties to be precise. And this can be attributed to the success of British entrepreneurs in conquering the hostile forest terrains of South India to usher an era of commercial coffee production. By 1840, India was producing enough to start exporting.
The taste of coffee depends on the type of beans and the process of roasting and brewing.
The coffee that is cultivated in India though is different from the one cultivated in Latin America. Unlike anywhere else in the world, Indian coffee is grown under a canopy of thick natural shade rather than direct sunlight. The main growing regions – Western and Eastern Ghats – are ecologically sensitive and have been identified as one of the world’s 25 biodiversity hotspots. This contributes significantly to not just conservation of their unique biodiversity, but also helps generate employment opportunities for workers residing in these hilly terrains of the southern states of Karnataka, Kerala and Tamil Nadu. Incidentally, these states contribute to about 99% of India’s total coffee production.
With its low acid content, Indian coffee is mild with a full-bodied taste and fine aroma. The 13 variants include scintillating Arabicas and Robustas, as well as specialty coffees like Robusta Kappi Royale (India’s flagship washed Robusta brand) and Mysore Nuggets that represent the finest coffee from India. Over time, South India has become a centre of filtered coffee, which is strong in taste and has to be diluted with plenty of milk. So essentially, Indian coffee is not like its western counterparts – for milk is an indispensable portion of the Indian coffee mug. And in recent years, coffee consumption has surged in the northern part of India too. According to consultancy firm Technopak Advisors, the Indian coffee chain market stood at Rs.1,820 crore in 2014 and is likely to reach Rs.5,430 crore by 2020. Market research firm Euromonitor’s report suggests that a positive consumer outlook towards new experiences such as premium coffee, higher disposable incomes and the rising number of young professionals were some of the key factors that promoted the growth of coffee consumption in India in 2015.
Coffee producers though still remain dependent on exports for sustenance. Millions of people worldwide prefer Indian coffee. Sourced from 13 distinct coffee growing regions of India and nourished by many different soils, each type of coffee is unique – in taste and flavour. While each variety has been well-received in the overseas markets, Indian Robusta in particular is highly sought after for its good blending quality. Significantly, Indian coffee, especially the espresso blend, is nowadays very popular in Europe. Indian Arabica coffee is also savoured by many, as it tends to be low-toned, subtle and rounder as compared to the brighter, more acidic varieties grown in South America and Africa.
The current export trends also substantiate the shift. India, today, has become the third largest coffee exporter to Italy (world’s third largest importer of coffee), after Brazil and Vietnam. “India is the world’s only country that produces a very high quality Robusta coffee which is hugely popular in Italy, Germany and other EU countries, and also in Russia. Our Malabar Monsoon coffee is very popular in Scandinavian countries. Indian Arabica is also very popular overseas and is selling at par with its Columbian counterpart. Our Arabica is a little milder than theirs and is well-liked in US and Australia,” says Dr. M. K. Shanmuga Sundaram, Chairman, Coffee Board.
Although India accounts for only 2% of the area under coffee cultivation, it boasts a 3% share of the overall global coffee exports. In FY2016, India produced around 3.48 lakh metric tonne (LMT) of coffee, of which about 2.2 LMT or 63% was exported.
Although coffee is regarded as an export market crop in India, the country’s trading potential and performance in this commodity have been plagued with several issues lately. Climate change and irregular rains have affected production this year. India’s Commerce Minister Nirmala Sitharaman had recently hinted about the decline in coffee production (next year) due to untimely rains. “Unfortunately, because of the lack of timely rains during the blossoming season of coffee, we expect that there will be a fall in the total output in the coming yearstoo,” she had said in a reply to a question posed at the Lok Sabha.
It is notable that the Government of India and the Coffee Board have established the Rainfall Insurance Scheme for Coffee (RISC) to provide a risk management aid to coffee growers. The scheme compensates the insured growers against the likelihood of diminished output resulting from shortfall/excess rainfall for different coverage options such as blossom showers, backing showers and monsoon and post-monsoon rains. However, some growers have raised issues like ‘inadequate subzoning’ that lead to faulty monitoring of rainfall.
Then there is the issue of a shortfall in skilled labour. According to the Karnataka Planters’ Association (KPA), the country’s coffee industry is grappling with severe shortage of skilled labour and must invest heavily in expanding its capabilities. Also, there are many small growers who are yet to be made aware of various government schemes.
In the wake of the soon to be implemented Goods and Services Tax (GST) regime, the Coffee Exporters Association has also requested the Department of Commerce to consider adding green coffee beans to the exempted list in the proposed GST. This they say, will give a boost to production and hence exports of the fruit from India.
Exporters to whom The Dollar Business spoke to, complained about high transport costs and resultant low margins. But then, export markets are showing signs of growth. For instance, the ICE (Intercontinental Exchange, New York) January 2017 robusta contract settled up $8, or 0.37%, at $2,161 per tonne after hitting $2,163, a contract high and two-year peak. Even India’s coffee exports are up by almost 20% as against last year (Coffee Board). And it seems Indian exporters will be doing brisk business this season. For those coffee traders who are not yet exporting, we have just one advice – wake up and smell the coffee!
Dr. M. K. Shanmuga
CHAIRMAN, COFFEE BOARD
TDB: What are the key challenges plaguing India’s coffee industry?
Dr. M. K. Shanmuga Sundaram (MKSS): The Indian coffee sector is mainly contending with the challenge of climate change. Throughout the growing season, there are certain periods when the crop needs regular uninterrupted rainfall. A shortage or delay in rainfall deeply impacts the production. As per the Coffee Board’s estimates, production is 8% less this year compared to last year, mostly because of shortage of rainfall in the month of March. Further, the month of September too was relatively dry. It’s only now that the major coffee
cultivation areas in the country have started getting some rains.
TDB: The Indian coffee sector is facing acute skilled labour shortage. Tell us about your efforts to resolve this issue?
MKSS: Yes, we do acknowledge this threat and understand the significance of skilled manpower. We have taken several steps to improve the situation. For instance, we run a one year PG diploma course in coffee quality. With 12 seats on offer, the programme aims to groom the next generation of skilled manpower for the coffee sector. We regularly conduct five-day workshops on testing, blending and roasting of coffee for aspiring entrepreneurs who want to start their own coffee/roasting blending business. We also conduct various other entrepreneurship programmes across India to encourage people to set up a cafe or a roasting/blending business and provide subsidies to such entrepreneurs. Moreover, we also train people under our Barista training programme, wherein our trained candidates get to participate in the World Barista Championship. Our aim is to promote India as an ideal destination for coffee cultivation.
TDB: Are you happy with the current export incentives provided to the sector, particularly under MEIS?
MKSS: We are fairly happy with the current levels of export incentives being provided to the players in our sector. The government has already announced the 12th Plan Scheme and I feel it’s quite pro-sector. For instance, it provides incentives for replanting of old coffee plantation, etc. We have got all the necessary approvals and are working towards implementing it in a phased manner. The Coffee Board, in close coordination with the GoI, is committed to introduce and execute more such schemes aimed at increasing the promotion, sale and consumption of coffee in India and abroad; conducting coffee research; financial assistance to small coffee growers; safeguarding working conditions for labourers; and managing the surplus pool of unsold coffee.
TDB: How does the Coffee Board help exporters?
MKSS: We give financial incentives to small coffee growers to help them export to foreign markets like US, Canada, Japan, Korea, Australia, etc. Moreover, we make sure that all coffee is exported (in retail packs) under the ‘India Brand’. We incentivise all shipments that adhere to our branding guidelines.
TDB: How do you view global coffee market? What are the main overseas markets for Indian coffee?
MKSS: One cannot deny that exports, in general, have fallen. However, this is not the case with coffee, and we have been able to maintain stable exports in recent times. This year, our performance will be better than last year. India is the world’s only country producing a very high-quality Robusta coffee which is hugely popular in Italy, Germany and other EU countries.
TDB: The popularity of value-added coffee products is on rise. Do Indian producers lag behind their global peers in this emerging but vital segment?
MKSS: Not anymore. Today Indian products are globally competitive. Each product must be considered on a case-by-case basis. In fact, last year’s figures reflect that 30% of our total coffee exports were value-added coffee. By this, I mean roasted ground coffee or instant coffee. Until 10-15 years ago, 90% of our coffee exports comprised green beans, whereas today 70% is green bean and the rest fall under the value-added variety.
There has been growth in production as well as exports of specialty coffee. Last year, while our total production of specialty coffee was 300,000 metric tonne (MT), we exported almost 50,000 MT of the specialty coffee produce. Many coffee farmers nowadays are also trying their hand at ‘micro-lot’ coffee. This is actually a small volume of coffee from a single farmer, which is produced separately, discretely picked or processed to have a special character.
TDB: What are your views on global coffee price fluctuations and decreasing unit value realisation?
MKSS: Coffee is the world’s largest traded commodity after petrol and is traded at prevailing international prices. It is true that domestic prices are also affected by the global trend. Hence, our endeavour is to boost the domestic consumption to benefit small farmers. With a robust domestic market, they need not depend wholly on the global orders.
TDB: Is Central Coffee Research Institute (CCRI) supporting the sector?
MKSS: The Central Coffee Research Institute (CCRI) is a 90-year-old institute dedicated to research and development of coffee. In the 2000s, the institute had come up with the Chandragiri variety of Arabica coffee which is very popular in India and aboard. To promote coffee production in India, the department has identified about 20,000-hectare of land in Karnataka, Kerala and Tamil Nadu. We intend to encourage the tribals to take up coffee farming in this area. North-East is another area on our radar. Growers and exporters can also get their samples examined at our state-of-the art labs and our quality department helps them with expert recommendations.
TDB: Please tell us about the nuances of coffee business?
Jayabrata Banerjee (JB): We pride ourselves as one of the well-known manufacturers and suppliers of high-quality roasted coffee beans, filter coffee, coffee premix and tea premix. We started our business in 2012 and are based out of Soro, Odisha. We are pioneers in introducing the specialty coffee concept in eastern India. In a short span of time, we have grown into a leading chain of coffee bars under the brand name ‘Sorrota Coffee’, with a strong presence in east India. We wish to become a one stop destination for all hot beverage solutions and have developed well-functional infrastructural facility that can process high quality coffee and tea in large quantities. We also have the latest equipment and our coffee and tea are processed at par with global standards.
TDB: What major issues would you highlight about coffee trade?
JB: First and foremost, lack of skilled labour is a huge issue. I also feel the government should step in to improve the access to credit. This would benefit many MSMEs, including us. It would also help boost our exports, but for this to happen we shall also require more inputs from the Coffee Board and the government. Taxation is another concern. So far, we are quite positive about the impact of the soon-be-implemented GST on the sector, and hope that it will improve ease of doing business, both in terms of the domestic market and exports. In my view, for us, the GST threshold should be kept under 8-10%, taking into account the fact that presently we are already subjected to 2% CST, 5% VAT and 1% entry tax. Further, we are also plagued with high transportation costs. As per the current CST/VAT regime, sending goods to different locations is a cumbersome and expensive process. As of now, we have to spend Rs.30-35 per kg on transportation, whereas our profit margin hovers around Rs.40-45 only. This clearly highlights the reason of our shrinking profit margins. Besides, there are clients who don’t have necessary registration and sending goods to them is very difficult.
TDB: The Coffee Board and the government offer information and training to coffee traders. Do you avail it? If yes, how has been your experience?
JB: Currently we are working on our own. However, I would like to know more about the various government incentives and assistance offered by the Coffee Board. There are umpteen coffee traders and manufacturers who are looking for quality information to strengthen their business. We have been trying to be more proactive on this front. I do however feel that the government and our representative body i.e. the Coffee Board also have to improve their communication channels. Delays in monsoon, Rainfall Insurance Scheme for Coffee (RISC), incentives to coffee suppliers, white stem borer infestation affecting our arabica plants, or the non-availability of high-yielding varieties to our growers, are just some of the aspects on which we, especially in the MSME sector, need more guidance. The industry definitely needs more handholding.