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Factors Affecting Bank Credit for Coffee Producers


Group of factors on characteristics of commercial banks

Group of factors on characteristics of coffee producing households


BANK CREDIT FOR COFFEE PRODUCTION HOUSEHOLDS

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Government Policy Factors

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Factors Affecting Bank Credit for Coffee Producers


Diagram 1.2: Factors affecting bank credit for coffee producing households

Source: Author's description


1.2. Practical basis of bank credit activities for coffee producing households

1.2.1. Practical experience in bank credit activities for coffee producing households in some countries around the world

1.2.1.1. Brazil's experience

As the world's leading coffee producer, the Brazilian government has placed great emphasis on credit policy in coffee development. Brazil's agricultural policy began to undergo a major transformation in the 1970s. At that time, it was an agricultural policy model based on a protected economy, an import substitution strategy, extensive subsidies, and minimum prices to ensure commercialization. However, the state's inability to repay its debts, combined with the economic instability of the 1980s in the country, led to the collapse of the rural credit policy in the early 1990s.

The failed credit model, coupled with the rapid and unplanned economic opening, led to a crisis in the agricultural sector. Most Brazilian farmers


inability to repay debts accumulated over many seasons, and facing a capital (and credit subsidy) crisis.

In the early 1990s, as credit tightened, the first soybean forward contracts emerged. Accordingly, multinational corporations, with access to hedging mechanisms through forward contracts and cheaper international credit, began to play a fundamental role in providing resources to producers to secure raw materials for export and for their manufacturing plants. This was the basic mechanism at the beginning of the transition from a public-sector monopoly credit system to a dual system – both public and private. The Brazilian private sector went from accounting for only 20% of total agricultural resources in the 1980s to more than 70% by 2005 [26], [47].

After decades of high inflation and attempts to control it, Brazil implemented an economic stabilization program called the Real Plan (named after the new currency, the real) in 1994 during the presidency of Itamar Franco. This economic package helped start a new economic cycle with a focus on agriculture and produced outstanding results in the sector. However, a more formal and secure mechanism was still lacking, resulting in the creation of the Cedula Produto Rural (CPR) – a type of bond issued by producers (farmers and cooperatives) based on future harvests. By 2010, the sources of financing for agricultural producers were 30% bank credit, 30% private funds, and 40% CPR.

The Brazilian government is very supportive of the development of the CPR and the issuance of the CPR is combined with other institutions, creating a sustainable development model for the Brazilian agricultural sector. This model involves a state agency (the commodity exchange), commercial banks, including a major bank that acts as a market maker, private investment institutions and a domestic futures exchange. This is an interesting model for other developing countries that want to increase their ability to provide credit for coffee exports. To be able to implement it successfully


This model requires the participation and complete mutual trust of the parties involved, especially the participation of the state [26], [47].

Among all coffee-growing countries, Brazil is arguably the country where farmers use market-based risk management tools the most. This may be due to: First, medium-sized farms and large plantations account for the majority of production. Brazil has 221,000 farms (of which 30% are larger than 10 hectares) and 70 cooperatives. In addition, the country has about 1,500 roasting enterprises, 9 instant coffee factories and 200 coffee exporting companies. Meanwhile, the size of coffee farms in Vietnam is mostly (more than 80%) from 0.2-2 hectares [17], [26], [35].

Agricultural producers receive bank credit against future crops as collateral. In Brazil, a system exists to ensure a close link between lenders and CPR issuers, in which they share knowledge of transactions, average harvests in regions, and potential yields. This system allows lenders to monitor the status of future harvests. Collateral and land are registered in the name of the owner through the CPR registry and are monitored by either an independent organization or the lender. Close monitoring is required at all stages of production. Pre-sowing surveys, monthly visits, and continuous checks during the harvest period ensure that no errors occur.

The Brazilian government will lend coffee farmers 2.1 billion reais ($1.14 billion) to cover harvesting and warehouse renovation costs for the 2010/2011 crop, according to the Brazilian Agriculture Ministry. The total amount of loans will be lower than the 2.16 billion reais provided for the previous crop (2008/2009), which was a similar crop, meaning that yields will be higher than the biennial cycle of Brazil, the world's top coffee producer. Farmers say harvesting costs will rise sharply this year, partly because labor is becoming harder to find, leading to higher labor costs. This has forced many farmers to hire machines to do the harvesting. However, the mountainous terrain makes using machines difficult.


The government disbursed the cash and the fund was named Funcafe, with the supervision of the state Banco do Brasil and several other private banks and required an appropriate interest rate regime to be applied to the disbursed amount. The banks disbursed the cash through their branches in the same way as normal banks.

Brazil's National Monetary Council (NMC), the state's top economic authority, has approved a budget of 3.16 billion reais ($1.5 billion) for the latest fiscal year for the coffee industry.

The financing, for the current crop, will be divided into 650 million reais to cover harvesting costs, 1.14 billion reais for storage costs, 500 million reais to finance roasters and exporters to buy coffee, 450 million for farmers' cooperatives, and the rest to be distributed to processing industries and others. The credits are very important for coffee growers, because with this support they will not have to sell coffee for cash needs and thus will not add to the downward pressure on prices [26][35].

1.2.1.2. Colombian experience

For Colombians, coffee is their national symbol. FCN

– The Colombian National Coffee Federation is an important body representing the Colombian coffee industry. Currently, the FNC has 560 thousand members, mostly farmers and stakeholders in the country’s coffee industry. The FNC supports research and development to increase production [46].

In 1992 Colombia produced 25% of the world’s output, but today it is only 7%. In 2006 Colombia spent $7.3 million in subsidies on the coffee industry, but this year it has spent only $700,000 to protect the income of growers. The issue of subsidies from the state budget for the purpose of replanting coffee in Colombia. Coffee growers in Colombia are organized in the National Coffee Growers Federation of Colombia (Federacafé).

Federacafé buys coffee from producers, processes the coffee, sells it to the domestic market and acts as an export company (competing with private companies). One of Federacafé's main goals is to protect the income of


farmers by guaranteeing them prices. This domestic price guarantee is provided by a stabilization fund, the National Coffee Fund. This is a public fund managed by Federacafé, operating under an annually renewed contract. The fund operates at the export level, covering both Federacafé and private exporting companies. The financial resources accumulated during periods of high world prices are used to support domestic prices when world prices are low.

During the prolonged period of low coffee prices that began in the late 1990s, when domestic prices were adjusted downward every few weeks to keep FNC from running into debt, Federacafé considered using futures and options to ensure that FNC funds would not be wiped out. But prices rose again and those discussions were shelved.

The Colombian government has provided credit to coffee farmers in the country to trade, buy and export more Colombian Arabica coffee. Many Colombian coffee farmers have been hoarding coffee without selling it for fear that the Colombian government will not fulfill its commitment to support coffee farmers during this disruption. The hoarding by farmers while this crop's output is the highest in the past 6 years has affected the country's Arabica coffee exports and has pushed up the price of Colombian Arabica coffee in consuming countries. Colombian coffee farmers will receive about 145,000 pesos/125 kg, equivalent to nearly 72 USD - about 0.6 USD/kg to compensate for part of the lost income after the serious decline in Arabica coffee prices in the past 2 years. Arabica coffee prices on the ICE New York exchange have fallen from 3 USD/kg in 2011 to about 1 USD in 2012 and 2013 until now. The initial support package encountered many obstacles due to fraudulent reports that farmers and intermediaries received support money that did not correspond to the coffee acreage they registered for.

To ensure the benefits of coffee growers, the Colombian Government has facilitated farmers by committing to maintain a minimum coffee selling price by the National Federation of Coffee Growers (FCN) and the Coffee Growers Support Fund. The main activities of the FCN include ensuring purchasing, expanding services, information systems, commercialization, implementing community support programs such as education, health, etc.


economy, infrastructure and increased competitiveness in coffee production. The World Bank (2002) assessed the FCN as “The Colombian coffee industry institution is not perfect, but the Colombian Coffee Growers Federation is one of the most successful industry institutions in the world”[46], [48], [92].

The budget for the 2014 coffee farmer support package is about $494 million, the same as in 2013. However, the Colombian coffee exporters association said that this amount may not be enough this year because Colombia's coffee production is expected to increase compared to last year's output. Luis Genaro Munoz, head of the National Coffee Growers' Federation, forecasts Colombia's coffee production in 2014 to be about 11.3 million bags compared to 10.9 million bags in 2013. This agency is also in charge of distributing the financial support package to Colombian coffee farmers [92].

According to Mr. Nguyen Ngoc Nhan, coffee growers in the Central Highlands should learn from Colombia, which is that when the coffee replanting program was implemented, the Coffee Growers Federation in this country directly developed a plan to assist farmers with capital and technology. Accordingly, each household replanted 20% of its area and the Government paid 40% of its debts. Coffee businesses will coordinate with farmers to manage risks and promote domestic coffee consumption. Currently, Colombia replants about 70,000 hectares of coffee each year. They will implement this plan until the end of 2020 to renew 300,000 hectares of old coffee [47].

1.2.1.3. Indian experience

India is a country in South Asia. It is the seventh largest country in terms of area, and the second most populous country in the world with over 1.2 billion people. Since independence in 1947, the Government of India and the Reserve Bank of India have made concerted efforts to provide access to credit to its people. Despite the phenomenal increase in physical access to banking institutions over the past few decades, the rural poor continue to depend on formal sources of credit. It is in this context that microcredit has emerged as the most suitable and practical alternative to conventional banking.


in achieving so far unreached poor people. Microcredit enables the poor to save and helps them in using credit and other financial services to improve their income and living standards [54].

After 1999, economic reform entered phase II. The policy on agricultural development in this period was clearly stated: Rapidly develop agriculture and agricultural-based industries. Focus on favorable areas such as areas with lots of rain, lots of fallow land, increase water resources, improve the rural credit system. Strengthen post-harvest management and have reasonable price policies for agricultural products. Following the construction of cold storages, the Government has modernized these warehouses to increase the storage capacity by another 80,000 tons. Cold storage for onions alone can hold 450,000 tons. Control fertilizer prices, balance the use of chemical and organic fertilizers. Continue to reform cooperatives. Implement crop insurance. Ensure accurate weather forecasts for agricultural production. Financial and credit policies for rural areas have also had many positive changes. The State increased credit for rural areas, at the same time as consolidating these facilities (in 1997, the State provided about 7 billion USD, in 1998: 8.4 billion USD). Regarding capital sources for agricultural production: Rural banks in each region have been established and have contributed up to 11% of credit for agricultural development. Financial and credit policies for rural areas have also had many positive changes. The State increased credit for rural areas, at the same time as consolidating these facilities (in 1997, the State provided about 7 billion USD, in 1998: 8.4 billion USD). At the same time, the Rural Infrastructure Development Fund was also established, with an increasing capital scale. Local agricultural banks were also reformed and restructured. The government encouraged the establishment of voluntary groups to invest in agriculture, thanks to which the number of these groups increased rapidly (in 1998-1999 there were 15,000 groups, in 1999-2000 there were 50,000 groups) [54].

Continuing the agricultural reform process, in February 2002, the Indian Government introduced the "Essential Commodities Act", removing restrictions on the transportation of agricultural products between states, so that farmers can sell their agricultural products at the best prices, strengthening the


cooperatives in rural areas, strengthening the role of credit cooperatives, providing sufficient and timely credit sources, and meeting irrigation water needs. A budget of 16 billion USD/year to implement measures to reduce post-harvest losses has also been proposed. A national committee on livestock care has been established. The system of commercial banks serving agriculture is also getting better: By the end of 2004, India had 67,283 branches of commercial banks, of which 32,178 branches were in rural areas, accounting for 47.8%. These are factors that have effectively supported India's agricultural reform in recent years. In 2005, India had an additional investment plan of about 3 billion USD to develop rural infrastructure, thereby creating more jobs, the first time such a large amount of capital was invested in rural infrastructure [54].

Regarding capital support policy for coffee production, India divides coffee producing households into 2 groups: over 10 hectares and under 10 hectares. Priority is given to the group of producing households with a scale of less than 10 hectares, supported with technology and processing equipment. After a period of capital support, the productivity and coffee quality of the coffee producing households improved and the quality increased [35], [54].

In 2010, the Indian government also provided subsidies to small coffee farmers to repay their debts after they suffered from a severe drought in 2009, which severely affected coffee production. Normally, coffee trees take 3-5 years to replant and will bear fruit for about 40 years. Previously, the Indian government also disbursed a package of 2.41 billion Rupees in the fiscal year ending March 2012 in two installments to help small coffee farmers (accounting for 70% of the country's output) with funding for planting.

1.2.1.4. Indonesian experience

As a major coffee exporting country in the world, Indonesia has favorable land and soil conditions for coffee trees, but only achieves an average yield of about 1 ton/ha, much lower than Vietnam with 4 tons/ha. Indonesia is the second largest exporter of Robustan coffee in the world after Vietnam. Vietnam and Indonesia account for 60% of the world's Robustan coffee production. Currently, lending products in rural agriculture, especially lending to production households

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