The International Growth Centre (IGC)-Government of Rwanda (Ministry of Agriculture) will on February 9 host an international conference on the country’s coffee sector. The meeting will bring together representatives from around the world to discuss knowledge sharing in the sector.
In an email interview with Rwanda Today’s Berna Namata, the IGC country director for Rwanda, Uganda and South Sudan gives an insight into the sector.
What are the key challenges facing the sector?
Rwanda, like some other countries in East Africa, produces some of the best coffee in the world, and this creates the opportunity for Rwanda to increase its exports through value addition.
Since 2006, the Rwandan coffee sector has seen a gradual decline in export volumes offset by a strong world price. Between 2006 and 2012, coffee export volumes fell from 26 million kilogrammes to 20 million kg.
In contrast, the world price of coffee has climbed from $2.50 per /kg in 2006 to a peak of $6.06/kg in 2012, offsetting the effects of the fall in production.
One way to more sustainably increase revenues is to increase the percentage that is fully washed (currently just 30-40 per cent).
A recent study of the International Growth Centre (IGC) found that, on average, the price of fully washed coffee is around $4.45/kg whereas ordinary coffee earns just $3.05/kg. This means that for each kilogramme of coffee that is processed in a coffee washing station rather than in a farmer’s house, Rwanda earns an additional $1.40 in export revenues.
As a result, the IGC study calculated that if Rwanda were to double the amount of coffee exported as fully washed coffee, holding constant total coffee export volumes and world coffee prices, it could expect a 10-20 per cent increase in coffee export revenues. This would amount to an additional three to six per cent increase in total export revenues.
Rwandan coffee continues to fetch average prices despite being of high quality. Why?
The effective coffee export price (calculated by dividing the export value by the weight) has fallen consistently below the world price of coffee. Between 2006 and 2012, both the Rwandan and the world price of coffee grew sharply.
Since 2012, there has been a gradual price reduction for both. The IGC study, undertaken by Prof Rocco Machiavello and Ameet Morjaria, found some evidence that the gap between the Rwandan and world price has narrowed since 2011.
One interpretation is that Rwandans are managing to upgrade to higher value coffee. Indeed, the number of coffee washing stations has grown rapidly. Between 2002 and 2014, they increased from just two to 229.
To continue to increase the price accrued to Rwandan farmers, the government is focusing on the need to upgrade the quality of coffee exports; that is why it asked the IGC to organise this conference on its strategy and ways to increase the share of fully washed coffee in exports.
Currently, production of coffee is directly linked to prices. A decline in prices leads to reduced production. What needs to be done?
As a small producer, Rwanda’s coffee export price cannot influence the world price. Price fluctuations are a fact of life. However, to reduce the vulnerability of the Rwandan coffee sector to price shocks there are a number of possible mitigation strategies.
One way is to increase the percentage of Rwandan coffee sold as high-quality specialty coffee. This is because niche coffee is bought by higher-income consumers who are less responsive to changes in prices. By contrast, low-value coffee is often sold in commodity futures markets with high price variability.
Rwanda is fortunate to produce some of the best coffee in the world, so upgrading quality has an enormous payback that can better weather demand shocks. Moreover, Rwanda might consider encouraging the expansion of the East African Commodity Exchange to include coffee. That can help to mitigate the risk of compressed sales prices by attracting a more diverse market.
What measures are needed to increase value addition in the sector?
First, lack of contract enforcement has meant that, despite the potential for higher prices from fully washed coffee, farmers continue to process coffee at home. Our researchers are diagnosing a market failure whereby price signals are not transferred to the farmer because of a lack of trust between farmers and coffee washing stations.
Second, access to working capital for coffee washing stations remains a constraint to growth. The study proposes establishing a system of value chain finance.
Third, poor managerial practices in some coffee washing stations has led to underutilisation. The study proposes new ways to raise their productivity, including encouraging private management firms to run stations and training managers.