0 Non-State Regulation of Agricultural Trade: The Case of Lampung Coffee Bustanul Arifin Professor of Agricultural Economics at the University of Lampung, UNILA-Indonesia Senior Fellow in the International Center for Applied Finance and Economics, IPB-Bogor Visiting Scholar at School of Geosciences in the University of Sydney, Australia E-mail: [email protected]Abstract This paper examines the growing concerns on non-state regulation of agricultural trade by looking more in-depth at the economics of coffee producing regions in Lampung Province, Indonesia. Our research finds that buyer-driven regulations of environmental practices in the coffee industry which characterize most global initiatives have somehow restructured the supply chain in producing countries. A negative campaign to blame illegal coffee producers for the loss of tiger in the Bukit Barisan Selatan (BBS) National Park in the province further complicates the problems, as the current coffee supply chain cannot guarantee the workability of price transparency, asymmetric structures of coffee markets, etc. Meanwhile, some community initiatives have developed to foster conservation of the protection forests by adopting coffee multi-strata practices under agroforestry system and community-based forestry management (CBFM or locally known as HKm=Hutan Kemasyarakatan) in the buffer zone outside the BBS National Park. The support system to negotiate contracts on temporary tenure security and protection of state forests could be seen a significant potential to develop micro-institutions at farm level which are compatible to sustainability standard and initiatives at global level. Initiatives on environmental service markets could be seen as a promising approach between poor coffee farmers who have practicing coffee agroforestry as provider and whoever the potential buyers of watershed services. The bridge between bottom-up initiatives at farm-level or institutional changes at supply chain organizations and top- down sustainability standard set by private sectors and NGOs could play effective roles in achieving better environmental governance in the coffee sector. Keywords: Sustainability regulations, Lampung coffee, supply chains, Indonesia ________________________ Paper presented at Seminar of Indonesia Study Group (ISG) of Australian National University (ANU), February 6, 2008 in Canberra, Australia. This paper is written under generous supports of Australian Leadership Awards Fellowship (ALAF) funded by AusAID. I would like to thank colleagues at School of Geosciences in the University of Sydney: Bill Pritchard, Phil Hirsch, Jeff Neilson, Kham T. Ngoc, and C.P. Gracy for intensive discussions and comments for the paper. However, the standard disclaimers apply. All remaining errors are author’s responsibility.
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Non-State Regulation of Agricultural Trade: The Case of Lampung Coffee
Bustanul Arifin
Professor of Agricultural Economics at the University of Lampung, UNILA-Indonesia Senior Fellow in the International Center for Applied Finance and Economics, IPB-Bogor
Visiting Scholar at School of Geosciences in the University of Sydney, Australia E-mail: [email protected]
Abstract
This paper examines the growing concerns on non-state regulation of agricultural trade by looking more in-depth at the economics of coffee producing regions in Lampung Province, Indonesia. Our research finds that buyer-driven regulations of environmental practices in the coffee industry which characterize most global initiatives have somehow restructured the supply chain in producing countries. A negative campaign to blame illegal coffee producers for the loss of tiger in the Bukit Barisan Selatan (BBS) National Park in the province further complicates the problems, as the current coffee supply chain cannot guarantee the workability of price transparency, asymmetric structures of coffee markets, etc. Meanwhile, some community initiatives have developed to foster conservation of the protection forests by adopting coffee multi-strata practices under agroforestry system and community-based forestry management (CBFM or locally known as HKm=Hutan Kemasyarakatan) in the buffer zone outside the BBS National Park. The support system to negotiate contracts on temporary tenure security and protection of state forests could be seen a significant potential to develop micro-institutions at farm level which are compatible to sustainability standard and initiatives at global level. Initiatives on environmental service markets could be seen as a promising approach between poor coffee farmers who have practicing coffee agroforestry as provider and whoever the potential buyers of watershed services. The bridge between bottom-up initiatives at farm-level or institutional changes at supply chain organizations and top-down sustainability standard set by private sectors and NGOs could play effective roles in achieving better environmental governance in the coffee sector.
Keywords: Sustainability regulations, Lampung coffee, supply chains, Indonesia
________________________ Paper presented at Seminar of Indonesia Study Group (ISG) of Australian National University (ANU), February 6, 2008 in Canberra, Australia. This paper is written under generous supports of Australian Leadership Awards Fellowship (ALAF) funded by AusAID. I would like to thank colleagues at School of Geosciences in the University of Sydney: Bill Pritchard, Phil Hirsch, Jeff Neilson, Kham T. Ngoc, and C.P. Gracy for intensive discussions and comments for the paper. However, the standard disclaimers apply. All remaining errors are author’s responsibility.
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1. Introduction
Non-state regulation generally refers to corporate codes of environmental and social conduct, which are essentially self-regulating systems. Recent trends, however, towards the legal enforceability of declared codes and mandatory public disclosure requirements suggest that such codes are not always as “voluntary” as they may seem. The controversial emergence of “Common Code for the Coffee Community (4C)” in 2004 should speak by itself that this global code of sustainability regulation does not obtain a warm welcome from coffee producing countries (see for example Daviron and Ponte, 2005; Neilson and Pritchard, 2007, Reynolds et al, 2007). In its official document dated September 9 of 2004, the objective of the Code is to foster sustainability in the ‘mainstream’ green coffee chain and to increase the quantities of coffee meeting basic sustainability criteria within all three dimensions: (1) decent working and living conditions for farmers and their families as well as their employees, (2) protecting the environment such as primary forest, conserving natural resources such as water, soil, biodiversity and energy, and (3) economic viability for social and environmental sustainability (Common Code for the Coffee Community, 2004).
When coffee producing countries were very disappointed by a record low of coffee price at the global market in 2001, and when several questions on “cartel of global buyer” or oligopsony market structures remain unanswered, one should not expect an immediate compliance with the new code from coffee producing countries, which consist of mostly developing countries. More specifically, just few months before the declaration of the so-called “new consensus” on the 4C, some coffee producing countries were fighting for “export retention” to increase the price through the Association of Coffee Production Countries (ACPC). This negotiation ended with a deadlock, under a situation of tensed suspicion and presumed sub-ordination of multinational corporations from developed countries, which then lead to freezing any activities of the ACPC. The collapse of ACPC is almost similar to the dismantling story of International Coffee Agreement (ICA) and some national coffee boards in the 1990s, after the organizations were not able to fight against the dominant power of global buyers, which are located in the developed countries [see for example Ponte (2002, 2004), Muradian and Pelupessy (2005)]. Currently, the high expectation being put at the shoulder of International Coffee Organization (ICO) to revive the coffee economy of producing countries did not materialize easily because of the vibrant dynamic of global coffee trade.
By the time of writing, the global coffee price rises to a record high of above US$ 3 per kilogram for Arabica which should provide high expectation of increasing income streams for farmers in developing countries. A high market price is one of important factors determining increasing farming area of coffee to increase the production, but could pose serious threats of forest conversion into coffee plantations. Elements of environmental dimension in the 4C include compliance on biodiversity conservation such as wildlife and endangered species, as well as on soil fertility conservation, proper use of pesticides and fertilizers that minimize the impacts on human health and water systems, respectively. Moreover, other sustainability standards and major governance initiatives in coffee sectors such as Rainforest Alliance, Shade/Bird Friendly, Utz Kapeh, Organic and Fair Trade are all concerned with ecosystem and wildlife conservation, as well as
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protection and water conservation. No matter how complicated and costly the new initiatives of non-state regulations, coffee producers from smallholder to large plantation shall aim themselves to comply with the sustainability regulations. Otherwise, their existence in the coffee economy would not last long as non-sustainability practices might harm their own land, the environment and social-economic system in the coffee sector.
In the coffee sector, the rising concerns on the sustainability standards emerge very rapidly in the last two decades, probably because of the dynamics of private sectors and multinational corporations. Certification and labeling systems are also expanding rapidly in the global food sector, including in the coffee sector, as the environmental and social standards in the coffee economy have serious and long-term implications for the sustainability of natural ecosystems in the tropics and the livelihood of coffee producers who are mostly small-holder farmers. In the business community, recent trends also support strongly the shifts towards more ethical business image through corporate social responsibility (CSR) in the global value chain in general. On the other hand, the emergence of third-party non-governmental organization (NGO) sustainable coffee initiatives has created certification networks which might be comparable to the multinational corporate structures and possibly bypass the existing state regulations, which somehow has their own belief system in administrative bureaucracy. Like it or not, these large multinational NGOs are central in establishing and maintaining legitimacy and effectiveness of international coffee certifications (Reynolds et al., 2007).
This paper examines the growing concerns on non-state regulation of agricultural trade by looking more in-depth the economy of coffee producing regions in Lampung Province in Indonesia. The coffee economy in this province faces serious challenges in terms of raising the yield, improving quality, increasing foreign reserves, developing a healthier market structure, while contributing significantly to raising farmers’ welfare and ensuring sustainable land use and resource management. A negative campaign by an international NGO to blame illegal coffee producers for the loss of tiger in the Bukit Barisan Selatan (BBS) National Park in Lampung Province of Indonesia could further complicates the problems, as the current coffee supply chain cannot guarantee the workability of price transparency, asymmetric structures of coffee markets, etc. Some community initiatives have developed to foster conservation of the protection forest by adopting coffee multi-strata practices under agroforestry system and community-based forestry (CBFM or locally known as HKm=Hutan Kemasyarakatan) in the buffer zone outside the BBS National Park. We argue here that the support system to negotiate contract on temporary tenure security and protection of state forests could be seen a significant potential to develop micro-institutions at farm level which are compatible to sustainability standard and environmental governance initiatives at global level. Other dimensions of environmental service markets are as a promising approach between poor coffee farmers who have practicing coffee agroforestry as provider and whoever the potential buyers of watershed services in the coffee producing regions.
The structure of the paper is organized as follows: After this introduction, Section 2 discusses the rise of sustainability standards and environmental governance in the coffee sector, where the role of voluntary regulatory system has evolved somehow into a process of restructuring the coffee supply chain up to the farm level organizations. Section 3 presents an overview of coffee production in Indonesia, with special references
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to the dynamics of coffee producing regions in Sumberjaya watersheds in Lampung Province, in Sumatra-Indonesia. Section 4 is an analysis on the intersection between global initiatives on sustainability regulations and the coffee economy of Indonesia, focusing on four main aspects: (a) position of coffee smallholders in the global value chain, (b) market structures and price transparency in the supply chain, (c) environmental service markets as entry points, (d) roles of domestic market and increasing effective demand, and (e) quality issues in post-harvest and coffee processing. Finally, the concluding Section 5 summarizes the findings and suggests the bridge between bottom-up initiatives at farm-level or institutional changes at supply chain organizations and top-down sustainability standard set private sectors and NGOs in order to achieving better environmental governance in the coffee sector.
2. The Rise of Environmental Governance in Coffee Sector
The rise of environmental governance in coffee sector and global food sector in general has evolved since the early 1990s and developed more rapidly in this century. Sustainability perspective and long-term consequences of coffee practices on natural ecosystem and social-economic dimensions of the livelihood have been discussed more widely by academic, government, private sectors and civil society or non-governmental organizations (NGOs). As the new development paradigms tend to seek alternatives for distortion effects of direct state intervention in commodity supply chain, in one extreme, non-state regulatory efforts are argued to democratize markets by increasing the role of civil society in regulating production and trade-related activities. On the other extreme, standard and certification institutions could serve simply as new vehicles of corporate control over global food production, trade and consumption (see Reynolds, et al., 2007).
The rise of environmental governance, sustainability standards and non-state regulations in general cannot be separated from the growing significance of global value chain (GVC) analysis, which generally disaggregates the structure of production, trade, and consumption of commodities by the level or network of activities controlled by firms. In the literature, the GVC approach identifies three key dimensions of commodity chains, i.e.: (1) input-output structure and geographical coverage; (2) form of governance; and (3) institutional framework (see Ponte, 2004). The governance issues emerge when the key notions of entry barriers and chain coordination have influenced not only the flow of goods and services in the global trade, but also the degree of complexity in the expectation of income streams by the economic actors. Generally, there are two types of governance in the global value chain: “producer-driven” and “buyer-driven” governance. “Producer-driven” chains are usually found in sectors with high technological and capital requirements, where capital and proprietary know-how constitute the main entry barriers, such as automobiles, aircraft, and computers. In these chains, producers tend to keep control of capital-intensive operations and sub-contract more labor-intensive functions, often in the form of vertically-integrated networks. “Buyer-driven” chains are found in generally more labor-intensive sectors, where information costs, product design, advertising, and advanced supply management systems set the entry barriers, such as garments, footwear, many agro-food commodities (see Gareffi, 2005).
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The roles of standard in the coordination of value chain determine and communicate the attributes of a product (Ponte, 2004), which could be classified based on the degree of complexity: (1) search, (2) experience, and (3) credence. In coffee sector, search attributes are those that can be verified at the time of the transaction, such as the color of a coffee bean. Experience attributes can be assessed only after the transaction has taken place, such as the taste of brewed coffee. Credence attributes are normally based on “trust” between buyers and sellers, instead of based on the physical characteristics, for example whether the coffee has been grown organically or not. In short, these attributes are related to the product itself, such as coffee appearance, taste, cleanliness, absence of taints, to the production and process methods, such as traceability of geographic origin, to the safety procedures such as pesticide residues, levels of toxins, and to the environmental and socio-economic conditions, or what is known now as the sustainability standards such as organic, fair trade, shade-grown coffees.
Using the above frameworks, Reynolds et al. (2007) suggest that sustainability standards in the coffee industry have been developed for the most part within voluntary initiatives, involving collective formulation by some stakeholders, outside the framework of government organization. These groups share the common interests on specific agenda such as consumer awareness on public health, fertilizer and pesticide contamination, organic perspectives, and other interests to protect endangered species, biodiversity and other functions of the natural environment. Involvement of the stakeholders was simply based on individual interests, before expanding into more strategic agenda of civil society groups, farmer’s organization, trade unions, etc. Given the increasing demand for products meeting new standards and the broad expansion of markets and competition, it has become increasingly necessary to ensure the credibility of the claims embedded in sustainability standards.
In the literature, there are number of works have been done in synthesizing major global initiatives in the coffee sectors dealing with sustainability standards and environmental governance [see for example Ponte (2004), Giovannucci and Ponte (2005), Muradian and Pelupessy (2005), Reynolds et al (2007), etc]. Based on the organization that develops the guidelines, at least there four general categories: (1) first party, (2) second party, (3) third party, and (4) fourth party “voluntary” regulatory systems. First party generally refers to “Coffee Sourcing Guidelines of Starbucks” which sets standards for good social and environmental performance. Later, the guidelines evolve into Coffee and Farmer Equity (CAFÉ) Practices, which is part of Starbuck’s preferred supplier program. Nevertheless, monitoring process of the CAFÉ Practices is conducted by third parties, and the costs to comply with this standard have to be paid by farmers. In returns, farmers are supposed to obtain reasonable price premiums. Example of second party regulatory systems is Sustainable Agriculture Information (SAI) Platform, in which specific commodity guidelines for sustainable agriculture along the food chain. Monitoring process would be conducted by the third party.
By its name, the third party certification involves private sectors or NGOs in setting the guidelines and monitoring the sustainability standards in the coffee industry. There are at least four major third party certifications currently operating in the coffee sector around the globe: Utz Kapeh, Organic, Fair Trade and Shade-grown (monitored by Smithsonian Migratory Bird Center SMBC and Rainforest Alliance). These third party
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certifications have similar missions and objectives to improve socio-economic and environmental conditions of coffee production and trade. Utz Kapeh originated as an initiative of Guatemalan coffee producers and the Dutch coffee company Ahold, which later become an independent Guatemalan-Dutch NGO. Utz Kapeh has developed a set of standards for third party coffee certification, formally equivalent to the EurepGAP, a certification system for the sourcing of fruits and vegetables led by European retailers (Giovannucci and Ponte, 2005).
Organic certifications generally set the following standards: (1) coffee is grown without the use of synthetic agro-chemicals for three years prior to certification, (2) farmers and processors keep detailed records of methods and materials used in coffee production and management plans, and (3) a third party certifier annually inspects all methods and materials (Ponte, 2004). Issues emerge in organic certification as there is a deficit of international harmonization in regard to organic standard, which could create non-fair market differentiations at the global level. Organic certification is viewed as one of the main challenges facing voluntary regulatory schemes in coffee industry, as this could alter traditional governance practices in rural communities by imposing paper burdens and externally designed procedures. Organic coffee has been used as a marketing tool to attract new consumers, despite the significant price differences.
Fair Trade certification is initially based on partnership between the Alternative Trade Organizations (ATOs) –such as Twin Trading, Oxfarm Trading, Equal Exchange – and coffee producers. Fair Trade is probably the oldest certification in global trade, as it has started purchasing products in developing countries directly from producers and selling them through networks of Third World Shops. In the 1980s, ATOs began labeling fair trade products through Fair Trade Labelling Organization (FLO) such as Max Havelaar and the Fairtrade Foundation. Even though, the total sales of certified Fair Trade coffee was only 13.6 percent of the total production of registered producers, the local impact of Fair Trade certification in producing countries is beneficial for producers in terms of income generations, organizational skills, capacity building, and resilience to external shocks (see Muradian and Pelupessy, 2005).
Shade-grown coffee certifications are also known as “bird-friendly coffee” as the shade tree grown in the coffee farms provides an excellent ecosystem for migratory birds, hence contributing to better biodiversity. The Smithsonian Migratory Bird Center (SMBC) has developed a certification system for production, processing, and marketing of shade-grown organic coffee that labels as “bird-friendly”. According to Muradian and Pelupessy (2005), this bird-friendly label is the most rigorous environment certification scheme in the coffee sector, as it combines organic standards with shade cover and species richness. In addition, shade-grown coffee certification is also developed by the Sustainable Agriculture Network, which has a secretariat in the Rainforest Alliance, an environmental group based in the US. The Rainforest Alliance then produces the label of “Rainforest Alliance-certified” coffee, which generally combines environmental and social criteria. Coffee has to be grown under the shade, although the shade criteria are less strict than in the Smithsonian certification, as Rainforest Alliance aims to enlarge the actual impact of the scheme in the shortest period of time (Ponte, 2004, Muradian and Pelupessy, 2005). The sustainability standards here also encourage coffee growers to comply with local laws, adoption of good environmental practices, where for example
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growers must not burn fuel-wood and other waste wood from pruning of coffee trees, and new coffee farms cannot established on cleared forestland etc. These standards are actually similar to those of Starbucks, SAI code and Utz Kapeh.
Finally, the fourth party certification refers to the initiatives by multi-stakeholders voluntary scheme, which has been explained in the introduction as the Common Code for the Coffee Community (4C). This initiative is led by the German Development Cooperation Agency (GTZ) and German Coffee Association (DKV), where the steering committee consists of major stakeholders in the coffee industry. The 4C codes also emphasize on the social and ethical principles such as paying minimum wages to the labors, avoiding child labor, allowing trade union membership, complying with international environmental standards on pesticide and ground-water contamination. Monitoring and auditing are conducted by third party organizations, and the costs of this certification are to be covered by coffee growers.
Currently, empirical evidence whether or not these standards have achieved the above objectives is still inconclusive, although some suggest that coffee farmers receive both direct and indirect benefits from sustainability standards (Giovanucci and Ponte, 2005). Similarly, it is yet not so clear what specific impact of these standards have contributed biodiversity, although there is speculation that these sustainability standards have become the necessary conditions to preserve local biodiversity in coffee producing regions. The most significant benefits of these sustainability standards are probably the potentials to strengthen social capital and to improve community-cooperative governance structures in the producing regions as these standards generally require establishment of farmers organizations and locally adopted code of conducts. However, many of these standards, provide no guarantee that direct benefits, particularly price premiums, would reach farm laborers or local communities in general (Giovannucci and Ponte, 2005).
Furthermore, Reynolds et al (2007) identify three key dimensions that distinguish private regulatory frameworks in the coffee sector and delimit their potential for promoting sustainability: (1) initiatives are distinguished by their governance arrangements – including the actors involved in creating and enforcing standards, the character of regulatory mechanisms, and their production and marketing strategies – which in turn shape their democratic potential; (2) regulatory frameworks are defined by their specific standards – including the depth of social and ecological concern, the rigor of their standards, and the inclusion of trade and price specifications – which determine whether certification works to hold the bar, avoiding the erosion of social and environmental conditions, or to raise the bar, improving social and environmental standards; (3) certification efforts are distinguished by their market coverage and growth potential, which are critical in shaping the power of these private regulatory frameworks to shape global production, consumption, and trade.
Another challenge in implementing the sustainability standards and environmental governance in the coffee sector is coordination among private codes of conduct and preferred supply system. Each company has its own interests and goals when it establishes a code of conduct or a sourcing system. According to Ponte (2004), the most viable form of coordination would be the promotion of a baseline code of conduct/ sourcing guideline on sustainability that can be adopted by individual companies. Coordination is also required to formulate criteria and indicators on some aspects where
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no universally recognized standards, for example on shade-grown coffee. Efforts should be directed towards ensuring that third party auditing (if not certification) is sought even in private initiatives.
The explanation outline previously reveals that although there are numerous benefits brought about by the sustainability standards, there are weaknesses that have to be faced by coffee producers and buyers. Producers could experience an interlocking system and high dependency dependence to certain buyers. Producers unavoidably have to bear hidden costs, and vulnerability for each certification scheme. Buyers could also be trapped with credibility threats when facing compliance problems with their partner coffee producers or traders in developing countries. As mentioned previously, sustainability standards in some cases can create new barriers to entry that threaten smallholder coffee producers, where issues of additional costs, adaptation and adoption process would not be solved by simply becoming a part of global coffee supply chain. The process of certification can be a costly and sometimes lengthy exercise which obviously increasing the transaction costs in the coffee economy.
As Giovannucci and Ponte (2005) have pointed out, the efforts needed to meet sustainability standards can create a virtuous circle of empowerment and organizational strengthening. In other cases, farmer organizations find it difficult to maintain cohesion if the expected benefits do not materialize in the short-term. For many, the hidden costs of marketing, coordination, and enforcement, uncertainty, and the limitations of collective action may significantly decrease the overall net benefits of certification efforts and threaten the existing governance structures in cooperatives or associations. If a standard becomes the de facto purchasing criterion, then most farmers will have to comply and will incur the same difficulties mentioned above. Furthermore, as these criteria become a widely accepted standard, there may be an increasing unwillingness among buyers to pay extra for such achievements – leaving farmers with higher costs of production and compliance burdens with no direct financial incentive.
In order to improve the quality of environmental governance of the coffee sector, significant involvement of coffee producers, from smallholders to large-scale plantations, is ultimately required in setting the sustainability standards. Producers’ interests could differ significantly from the buyer interests or final consumers in developed countries. In this case, private sectors and coordinating NGOs must build support for existing public social and environmental regulations, as well as create “democratic” and accountable certification systems. State agencies and public institutions cannot ignore the outcome of such adoption and adaptation of sustainability standards developed by non-state entities and global initiatives. Therefore, public private partnership between state regulatory bodies, NGOs, and private sectors should reinforce and extend sustainability standards and environmental governance of coffee production and agricultural trade in general.
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Table 1. Sustainability Regulation in the Coffee Sector by Certification System
Third Party
Important Dimension
First Party Starbucks
Second Party SAI Utz Kapeh Rainforest Fair Trade Organic
Fourth Party
4C
Sustainability focus of environmental governance
Not specific, but natural conservation
Sustainable agriculture, organic input
Not specific, environmental conservation
Biodiversity, soil fertility, agro-ecology
Not specific, but close to organic input
Soil fertility, and erosion resilience
Water, soil, biodiversity and energy.
Coordination type, between farmers, traders, roasters
Sources: Synthesized by the author from several sources: Muradian and Pelupessy (2005), Giovannucci and Ponte (2005), etc.
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3. Overview of Coffee Production in Indonesia
Indonesia is the fourth largest coffee producer, after Brazil, Vietnam and Columbia. In 2006, Indonesian coffee production was 406.2 thousand ton, which was a significant decrease compared to 519.5 thousand ton of production in 2005. The decline can be attributed to the phenomena of unpredicted wet seasons and long drought due to climate change, low yield and poor post-harvest, and some tenure problems. These factors could also explain the performance of coffee production in Indonesia. Although coffee production in 2007 was estimated to slightly increase, reaching to 411 thousand ton, this level of production was far below the potential should the best farming practices were applied properly. Coffee consumption in Indonesia remains low at about 120 thousand ton per year, hence bringing the producers and traders to target coffee marketing to the international market.
The roles of coffee export in foreign reserve earnings of the Indonesian economy are unquestionable, even though the performance is not as good as in the 1980s and 1990s. In 2006, Indonesian coffee export was about 286.2 thousand ton, which was a significant compared to export quantity of 407.7 thousand ton in 20051. Most of the Indonesian coffee exports are Robusta (80 percent) and only small portion of are Arabica (20 percent). Coffee prices in the world market have increased significantly in 2007 because of limited amount being traded and other factors contributing to the price surge of food and agricultural products. By the time of this writing, the Robusta price was 202.7 cent of US dollar per kilogram, while the Arabica price was 304.3 cent of US dollar per kilogram (World Bank Commodity Review, January 2008).
In 2007, area of coffee production in Indonesia was estimated at about 1.27 million hectare, spread mostly in Sumatra, Java and Sulawesi. Provinces of Lampung, South Sumatra, East Java, are producers of Robusta coffee, while the highlands of Aceh, North Sumatra, South Sulawesi, and Bali are suitable for Arabica coffee. The national average of coffee yield is about 0.64 ton per hectare, where the yield of Robusta coffee is slightly higher than that of Arabica. Increasing coffee prices in global market would provide significant incentive system to improve the yield and quality of coffee, hence increasing foreign reserves from coffee exports. Because of increasing demand from the global market, some coffee producers and traders are currently developing specialty coffee, such as Mandailing, Toraja coffee bean. Improved security situation in a torn-conflict coffee regions such as in Aceh is expected to have positive impacts on the Indonesian coffee economy, as Arabica specialty coffee is recently growing its share in foreign reserve earnings. Global buyers and large corporations such as Starbucks have developed its pilot projects of sustainability regulations in South Sulawesi and North Sumatra, known as CAFÉ (Coffee and Farmer Equity) practices, which might lead to 1 The data on coffee area, production, export, and consumption are collected from several sources such as the Directorate General of Estate Crops of the Ministry of Agriculture, Central Agency of Statistics (BPS), and the Association of Indonesian Coffee Exporters (AEKI). After decentralization in 2001, problems on data consistency have increased due to poor reporting procedures and performance from local governments to central government. Coffee data published by International Coffee Organization (ICO) could be used as a reference of consistency-check. One should note that ICO data are available in a bag-unit of 60 kilogram. Conversion to a metric ton unit should be conducted by multiplying the published numbers with 0.06..
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“preferred supplier scheme”. This specific code is developed in conjunction with conservation practices for coffee production, with support from large scale international chains of non-government organizations (NGOs).
Source: International Coffee Organization (2007), processed by the author.
Figure 1. Growth of Indonesian Coffee Production and Export 1977-2006 (in metric ton)
In 2006, coffee production in the Province of Lampung contributed to about 35 percent of national coffee production. The foreign reserve earnings from coffee export has contributed to more than 50 percent of total export earnings of this province, marking the significant importance of coffee in the province economy. Problems of long drought in Lampung have caused incomplete fruiting process of the crops, hence reducing the coffee production to 141.3 thousand ton in 2006, from 143.1 thousand ton in 2005. Export performance of Lampung coffee was 224.8 thousand ton, generating US$ 250.6 million of foreign reserves in 2006. These numbers were significantly lower than the coffee export performance of 2005, which recorded 329.3 thousand ton or US$ 271.3 million in foreign reserves2. However, a relatively more favorable weather in 2007 is expected to increase the production of Robusta coffee in the province.
2 These data are collected from the Provincial Services of Estate Crops in Lampung Province (Dinas Perkebunan Provinsi Lampung), which were then verified using the data from the Regional Office of Association of Indonesian Coffee Exporters (AEKI).
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One should note that the total amount of coffee export from Lampung does not reflect the total coffee production in the province as the trade statistic is based on the total amount of coffee exported from the Port of Panjang in Lampung. This also includes coffee production from the Province of South Sumatra, Bengkulu, and even Jambi. All of coffee producers in Lampung are small farmers, who control the upland production system of two hectares or less. Therefore, the general problems facing small farmers such as limited access to new technology, market information, price structure and best practices in farming system are also found in coffee farmers in the province. Interestingly, the large-scale processing companies such as Nestle (Switzerland) and multi-national coffee-trading companies such as Ecom Agroindustrial (Switzerland), Olam (Singapore), Andhira (Netherlands) and Noble (Hongkong) are operating actively in Lampung Province. Moreover, a number of local coffee processing companies has been around at least since the 1970s, such as Bola Dunia, Sinar Dunia, Sinar Baru, Siger, Jempol, etc. These domestic companies sometimes serve as an immediate buyer that could obviously determine the price structure and marketing system of Lampung coffee.
The production centers of Lampung coffee are mostly concentrated in the district of Tanggamus and West Lampung, which are adjacent to the Bukit Barisan Selatan National Park (BBSNP). In 2006, the coffee area in Tanggamus was 49.3 thousand hectares (30 percent of total area in Lampung) which produced 24.1 thousand ton (17 percent of total production in Lampung) of Robusta coffee. Sub-district of Pulau Panggung is the major producer of coffee in Tanggamus District, contributing to about 34 percent or total area in the district. While in West Lampung District, the coffee area was 1,851 hectares which produce 113 ton of Robusta coffee. Sub-districts in Sumberjaya is one of major coffee producers in West Lampung district, contributing about 24 percent to total area in the district3.
Coffee production system in Lampung Province takes place mostly in the forest margins, which include protection forest and the National Parks. These two land-use systems are among five categories of forest land-use classification systems. The remaining three land-use systems are: production forest, limited production forest, and conversion forests. Theoretically, forest conversion into agricultural land can only takes place in the conversion forests. While production and limited production forests are mostly for timber production and other non-timber economic activities. Protection forest and National Parks are aimed at water and land conservation and habitat protection so that no agricultural activities are permitted in these two ecologically sensitive forests.
In the literature, driving factors determining the expansion of agricultural land into forest area include expected higher income streams, increasing returns to land and returns to labor, mostly due to favorable price incentives (pull-factor), and population-induced land-use intensification (push factors), unclear property rights and land-tenure system [see for example Angelsen (1995); Tomich et al. (1998), Arifin (1999), Angelsen et al. (1999] Budidarsono et al. (2000), Verbist et al. (2005)]. Under a subsistence approach, farmers expand into forest margins because of the pressures on increasing food demand or income requirements of farm households. Under a market approach, the relative profitability of agricultural production or increased agricultural output prices, in
3 These data are collected from Provincial Statistics of Lampung, as cited by Kompas, July 16, 2007.
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particular for annual crops, is a major factor behind agricultural expansion. The policy implications therefore should be different depending on the approach chosen. A main policy recommendation according to the subsistence approach is population control and agricultural intensification; so that increased productivity will reduce the deforestation pressure. The market approach draws attention to the development of the rest of the economy, instead of the agricultural per se. The importance of alternative employment should be emphasized, even though cautious interpretation should be given about the counter-productive effect on deforestation of intensification programs that increase the profitability of agriculture close to forests (see Angelesen et al, 1999).
In relations to the forest cover loss, the history of coffee farming in Lampung has been controversial, as well as the frontier characters of migrants coming to the province. As early as 1833, migrants from South Sumatra, especially Semendo sub ethnic group, opened forest jungle for coffee farming. This sub-ethnic group was believed to be the first coffee growers in Sumberjaya area of then North Lampung. The settlements of these groups occurred along the riverbanks of Way Besay river in the area and the greater Tulang Bawang basin, by growing upland rice and some lowland-rainfed paddy fields. To start cultivating coffee, these migrants must clear the forest, apply shifting cultivation system, where long-fallow system are possible to adopt. Forest clearing is sometimes associated with expanding the boundary of controlled land, which provides more security system of land tenure. However, as the population pressure increases, the long fallow system was then economically not possible. Intensive agriculture becomes more common, although it does not necessarily involve high-intensity of modern or chemical input use, but rather more on intensive-labor allocation (Arifin, 1999).
The coffee history in Lampung is clearly much younger than the first coffee introduction to Java in 1699 (see McStocker, 1987) by the well-known trading giants of the seventeenth century the Dutch United East India Company VOC (Verenigde Oostindische Compagnie). Rapid coffee development in Java could be associated with the enactment of Agrarian Law of 1870, which allow individuals and companies to open up coffee plantations from smallholders to estate large-scales, especially Arabica. However, the strike of leaf rust during the 1880s destroyed coffee plantation, affecting Arabica production significantly. Introduction of the disease-resistant Robusta species in the 1900s, has somehow spread the dominance of smallholder coffee production, including to Sumatra and other places. Other than disease-resistant, Robusta coffee is more farmer-friendly and easily managed as it does not require intensive practices.
As the flow of transmigration from Java to Lampung grew significantly in the 1950s, Way Besay in the Sumberjaya watersheds becomes one of attractive destinations, in additions to Way Sekampung watersheds in Central and South Lampung. This government-sponsored transmigration has really changed the culture, farming practices, and the Lampung economy in general. Learning from the success of previous migrant predecessors, the wave of spontaneous migrations from Java came to Lampung as “the new land of opportunity” as the agricultural land in Java became relatively more limited. In the new land, ethnic group of Javanese (from East and Central Java) and Sundanese (from West Java) brought the intensive rice cultivation system, while also adapting coffee cultivation from earlier Semendonese settlers. In a relatively short time, Javanese and Sundanese migrants outnumbered the first settlers of Semendonese and somehow
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changed the patterns of agricultural practices in the watershed. More permanent and intensive agricultural practices became more common in the area, as well as simple techniques of soil management, weed controls, agronomic practicing such as pruning and grafting. As population pressures continue to increase, the demand for coffee land increases significantly, in which the migrants started to grow coffee in the forest margins, even in the state-owned protection forests and possibly the BBS National Parks, especially in the 1970s and 1980s.
Studies by Budidarsono et al (2000) suggest that coffee area in Lampung has grown significantly at a rate of 8.25 percent per year during the period of 1970-80, although the growth rate decreased considerably in the period of 1980-1990. The study also suggest that coffee-farming system in the area offers reasonable high return to land and relatively higher returns to labor. The net present value (NPV) of coffee farming system per hectare in Sumberjaya ranges between Rp 0.92 million as the lowest (for the frontier type of coffee system with non-secure land tenure) and Rp 4.88 million as the highest (for coffee agroforestry system on secure land tenure). Revenues from selling the fruits harvested from tree crops in the agroforestry system complex contribute significantly to the farm households practicing multi-strata coffee agroforestry. The income stream would be much higher if the revenue from selling the timber during the initial land clearing is accounted in the estimate. Economic returns of coffee farming to labor range from Rp 5,000 to Rp 7,815 per person day in a 1998 base year, which is about 25 to 95 percent higher than average agricultural wage rate in Sumatra. In shorts, high economic returns of coffee-farming system would constitute pull factor of migrations to Way Besay watershed in Sumberjaya, let alone providing more pressures for forest conversions into agricultural land.
Coffee production from Sumberjaya is marketed to the nearby town of Fajar Bulan by collector traders. This town is considered the collection center of coffee from many sub-districts in West Lampung. The collector traders sometimes sell the coffee to the middlemen in Kotabumi, or sell directly to broker traders and/or exporters, located in the city of Bandar Lampung, the capital of Lampung Province, which is about 200 km from Sumberjaya. These brokers or exporters are normally the member of the Association of Indonesian Coffee Exporters (AICE or AEKI). Nevertheless, exporters do not always market the coffee to the international markets, especially if the quality does not meet the minimum standard of export requirements. Instead, coffee production from Sumberjaya and Tanggamus is sold to local coffee processing companies to produced a typical coarse grinded coffee with a strong coffee flavor (kopi kampung) under a locally well-known brands such Bola Dunia, Sinar Dunia, Sinar Baru, Siger, Jempol, etc. The final coffee products of these companies are significantly different from instant coffee produced by modern processing companies under the brand of Nescafe, Indocafe, Torabika, etc.
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Figure 3. Generalized marketing channels and distributions system of Lampung coffee
In Lampung, coffee farmers generally have been in close relationship with collector traders, who often times provide cash money during the production process without complicated procedures of money lending etc. In returns, these farmers have to sell their products to these collector traders, leaving the smallholders have limited choices of marketing channels, hence creating an interlocking trading system at the village level. Interestingly, these traders encourage farmers to harvest the coffee in asalan quality, hence allowing the value-added is accumulated in collector’s holders. Situation of high degree of dependence on collector traders due to money-lending business, the bargaining position of coffee farmers is very low. As a result, the market structure of coffee marketing system at village level is relatively unfair where monopsonistic behavior of collector traders has distorted away the price transparency. On why coffee farmers tend to listen only to collector traders are not only about economic decision making, but also related to the level of trusts, socio-psychological factors and other social capital of the coffee economy. These are subject to more detail investigation on micro institutional setting and careful analysis of the roles of non-state regulation
Large traders Exporters
Middlemen
Large traders Exporters
Domestic industries
Collector Traders
Farmer’s groups
Collector Traders
Roasters
International markets
Domestic markets
Rural A
rea U
rban Area
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Similarly, at the global trade level, coffee exporters are fighting to obtain a fairer price from their partners overseas. Exporters that are affiliated directly with global roasting companies usually do not have such complicated procedures in business negotiations. In the growing global value chain initiatives, buyers tend to establish subsidiary trading and roasting companies at coffee producing regions in developing countries. These companies generally take care of certification costs in to capture the interests of smallholder farmers who cannot afford such extra costs. The history of coffee zone system (rayonisasi) in Indonesia – and other important commodities such as tea, sugar, and fertilizer – reveals the tale of distortions in agribusiness-related commodities in Indonesia. Consequently, the small farmers are also inter-locking with such supply chain systems due to how powerful the global buyers influence up to the farm level in rural area.
The fear of single-buyer system is probably the most considerable concerns of Lampung coffee in the new global system of sustainability regulations. Currently, buyers of smallholder coffee productions include exporters, roasting companies and local coffee factories, through distribution system outlined previously. Major coffee exporters in Lampung include Aman Jaya Perdana, Indocafco, Andira Indonesia, Antara Saudara and Indera Brothers, which absorb nearly 70 percent of total coffee production in Lampung. Major roasting coffee companies include Indocafco and Nestle, which recently have been more active in promoting sustainability standards of the global value chain system. Theoretically, the fairer competition among these buyers in setting the price discovery of coffee from rural area will be, the better the market structure and price transparency, hence the higher the price premium received by the farmers. However, when these farmers do not have luxury in choosing which collector traders, the marketing system tend to be inefficient, because these buyers seem to have a single power in setting the farm gate price in rural area.
As explained previously, Lampung Province is the biggest coffee exporting region in Indonesia, contributing to about 70 percent of the total coffee export of 300 thousand tons each year. There are about 700 registered coffee exporters from Lampung, but only about 40 exporters are currently running the business. The price drop in 2001 is argued as the main factors explaining the coffee business in this province. Recent price increase in the world market is expected to revive the coffee economy in Indonesia in general. Major destinations of coffee export from Indonesia include European Union, United States and Japan. As of now, there is no major complaint on coffee quality and food safety, regarding the mould and Ochtratoxin A (OTA) contamination from buyer countries. However, because most smallholder coffee farmers in Indonesia tend to harvest green coffee cherry and the processing and post-harvest handling are still traditional, the food safety issues could become serious threats in the future. Since 2006, Lampung Province, especially the District of Tanggamus has been on the list of OTA observation and in-depth studies by the Food and Agricultural Organization (FAO) on the United Nations (see Susila, 2006). The case of OTA contamination might not be found now, but failing to take serious action in this food safety issue, the Indonesian coffee would be in jeopardy at the global market.
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4. Environmental Issues in Coffee Production: The Story from Lampung
As explained previously, the growing significant of coffee farming practices in Lampung Province could provide serious threat to the environment. Conversion from primary and secondary forests into more permanent intensive agriculture would cause significant changes in ecological services provided by the forest, as this process changes the vegetation, evaporation-transpiration, biodiversity, and social system underlying the natural resource management. Expansion of coffee production into the protection forest and National Parks could create more complex dimension of resource management and policy implications to improve the economic welfare. The notions that forest-cover loss or “deforestation” would cause tremendous negative impacts on watershed functions are often used as the main justification for classifying large areas of land as protection forest. Following the five main forest land-use classification, protection forest in Indonesia covers almost 15 percent of the total land area or 20 percent of the 143 million ha designated as state forest land, despite the fact that much of the forest cover has already disappeared.
In the literature, forest conversion into agricultural land is not only about the “encroachment” issue driven by population pressures and shifting cultivation, but also related to the misdirected land-use policies, poor property rights, and weak enforcement structures of natural resource management (Angelsen, 1995, 1999; Arifin, 1999; Geist and Lambin, 2002) Moreover, land-cover change is not a simple continuous process from forest-based system into agricultural practices such as coffee farming system, but rather it is a disjointed process with period of rapid changes often triggered by a shock effect. The second wave of coffee farming expansion into the state forest in Sumberjaya watershed after the economic crisis in the late 1990s could not be simply associated with a linear process of population pressures and poor people who are perceived of land-hungry. A three-fold increase of coffee price due to currency devaluation has played important roles in coffee expansion, coupled with improper farming techniques in the steep slopes, misconstrued policy actions and possibly the “revenge” perceptions of bad experience during major evictions in the early 1990s.
These complex environmental issues of coffee production system in Indonesia could not be handled by negative campaign to blame such “illegal coffee producers” for the loss of tigers from the Bukit Barisan Selatan (BBS) National Park in Lampung Province, such as reported in recent studies by WWF-Indonesia (WWF, 2007). The contrary effects of “illegal” labeling for such coffee may create more problems in coffee price formation at the farm gate, where small farmers have never received farm-gate price closer to market premium of coffee at the international market. Similarly, campaigns to shame the importers who buy coffee without asking too many questions on the origin of the beans could hinder the efforts to improve the asymmetric structures of coffee market. Buyers representing importer trading companies in the international market might not strongly enforce the details of coffee origin for the smallholder producers. What has been emphasized so far is more about the quality of coffee, particularly the water content that could influence the particular flavor of Robusta coffee from Indonesia.
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In-depth studies by Murniati et al (2001) in Kerinci Seblat National Parks (KNSP) in Western Sumatra, Indonesia suggest that mutual linkages have traditionally occurred between KSNP and communities that live around it. Communities extract many resources from the Park to fulfill their basic livelihood, such as fruits, fuelwood, timber, medicines and wild animals. These traditional linkages were not destructive when the population density around the park was low. As population density increased, livelihood pressures on the park have intensified, leading the traditional people-park linkages toward greater natural resource exploitation. The gathering of forest products from the national park takes place on a continuous or an occasional basis, depending upon the products obtained. Timber and fuel-wood are gathered continuously. Products such as rattan, incense, palm fibers, and game animals are obtained on an occasional basis. Therefore, efforts to increase land productivity in the park buffer -zone to deflect settlement pressure would provide more promising results, compared to simply blaming the inhabitants living and practicing non-intensive farming practices for many years around the park. In short, agroforestry systems have been viewed as one of the most promising ways of intensifying land use in buffer zone areas (Garrity, et al. 1996; de Foresta and Michon, 1997).
The case on environmental issues and coffee production in Lampung Province, Indonesia is drawn from field studies in three subsequent studies in the last seven years. First is a study on Partnership for Local Economic Development (PLED) funded by the United Nations Development Program UNDP (2001-2003), on Rewarding Upland Poor for Environmental Services (RUPES) Program funded by International Fund (IFAD) (2004-2005), and on Broadening Access and Strengthening Input System (BASIS), funded by the United States Agency for International Development (USAID), (2006-2007). The PLED program was commissioned by the National Planning and Development Agency (Bappenas), while the RUPES and BASIS programs were commissioned by World Agroforestry Center (ICRAF), Southeast Asia.
At the time of our study, Sumberjaya was part of the new district of West Lampung, which was previously administered by the North Lampung district. In 2000, Sumberjaya was divided into two subdistricts: Sumberjaya on the East side, managing 15 villages, and Way Tenong on the West side, managing 14 villages. The new Sumberjaya is only 35,646 hectares, a significant decrease from the old Sumberjaya of 54,194 hectares. Almost 90,000 people lived in the old, larger Sumberjaya; the new, smaller sub-district has perhaps 50,000 people. Coffee plantations are the major land use in the upper watershed (44.6 percent of the total sub-district), with paddy rice on the lower portions (5.13 percent). The rest of the land is mostly protected forest, the ultimate function of Way Besay sub-watershed. A coffee monoculture is grown on about 20.1 percent of the total watershed area; and coffee-agroforest – also known as multi-strata or shaded coffee – is grown on about 24.5 percent..
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Figure 2. Way Besay Watershed of Sumberjaya, Sumatra Indonesia
The Sumberjaya boundary coincides with the watershed area of Way Besay, which also includes protected forests, such as: (1) Register 39 Kota Agung Utara, 49 994 hectares; (2) Register 44B Way Tenong Kenali, 14 000 hectares; (3) Register 45B Bukit Rigis, 8295 hectares; and, (4) Register 46B Palakiah, 1800 hectares. Register 45B Bukit Rigis is the most significant for watershed protection because it has 11 rivers and streams feeding agro-ecosystems. More importantly, land use changes in Sumber Jaya in recent decades and socio-economic interactions with other external factors have revealed several environmental, economic and social issues.
Forest cover and agroforestry are both very dynamic in the Sumberjaya area. The amount of forest in the area declined from about 60 percent in 1970 to 32 percent in 1978 and to 10 percent in 1990 and 2000. Over the same period, the area covered by coffee-based agroforestry systems increased from about 8 percent in 1970 to 20 percent in 1978 to about 63 percent in 1990 to about 70 percent in 2000 (Arifin et al., 2008). Coffee is grown in three production systems in Sumberjaya: monoculture coffee, shade coffee, and multi-strata agroforests. Shade coffee and multi-strata agroforests have been expanding since 1984 and now occupy about 36 percent of the area (Verbist et al., 2005). As mentioned previously, the rate of deforestation peaked in the 1998-1999 period, when
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farmers took advantage of the fall of the Government of President Soeharto, a sudden increase of coffee price due to currency devaluation and the relative freedom of the early days of Reformasi to expand coffee production in the protection forest and national park. Despite its higher conservation status under the New Forestry Law 41/1999, the rate of deforestation has been higher in the National Park than in the protection forest (Ekadinata et al., 2004). Studies by Van Noordwijk et al. (2000) and Verbist et al. (2005) have shown that well-managed multi-strata agroforestry systems can be consistent with good soil management and watershed. Finally, a study by Suyanto et al (2005) shows that farmers with secure property rights are more likely to establish multi-strata agroforestry systems than monoculture coffee systems.
In the early 1990s, Sumberjaya was notoriously known for conflicts over land use. The “security approach” employed by the authorities during Soeharto administration led to mass evictions of thousands of families living in the area and growing coffee in the protected forests. The government adopted the “rule of law”, in which people are banned from making a living in the protected sub-watershed area, despite the inhabitants arguing that they had been practicing coffee farming for more than three decades. Meanwhile, in that early 1990s, the government was planning to build a PLTA Besay hydro-electric power station (HEPP) using water from the Way Besay catchment, to increase energy supplies to southern Sumatra and surrounding areas. However, as the authority was only accustomed to a linear and command system, this state-owned enterprise used military power to remove people from the protected forest. Participatory planning in the development process was a luxurious approach at that time, so there was no dialogue to resolve the conflict.
Conflicts over land and resource use grew significantly as the information and communication process did not flow very well among stakeholders involved in the resource use and management. The escalation of conflicts increase as the land status and property rights were poorly defined and enforced. In one extreme, the Ministry of Home Affairs recognizes the existence of a village within the protection forest, in which coffee farmers and dwellers pay the property taxes, levies and other retributions. On the other extreme, the Ministry of Forestry has never acknowledged any farming practices in the protection forest, let alone in the National Parks. What has been observed so far is that the tendency towards more permanent coffee farming and unsustainable monoculture in coffee practices has cause serious land degradation in the area, and the loss of forest cover in West Lampung or in Northern Lampung districts in general. A comparable figure is also suggested by Lumbanraja et al, (1999), claiming that in 1970, primary forest covered 57.4 percent of the area, while secondary forest covered about 12 percent of the area. However in 1990, the primary forest last only 12.3 percent and secondary forest last only 18 percent. The majority of land use in the 1990s is smallholder coffee farming or locally known as kebun (60.4 percent), and the remaining was allocated for paddy field, home-garden and houses and buildings.
Public image therefore emerges that coffee cultivation system is associated with land degradation and deforestation. The image was not totally wrong as the adoption of monoculture coffee and unsustainable farming practices especially in the steep slopes were commonly found in Lampung. The rate of forest cover loss was among the highest in Sumatra, comparable to the rate in the Province of Riau. Estimates of soil erosion in
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the watershed range from 25 ton per hectare to 37 ton per hectare, depending on the age of coffee and the degree of shade and cover crops [see for example Agus et al, (2002); Widianto et al, (2002)]. The Way Besay watersheds and the greater Tulang Bawang River Basin in Lampung Province are considered as one of the most degraded land in Indonesia. The history of pressures to convert forest area into agricultural land increase when the expected income streams from coffee farming rise such as what happened in 1993/1994 due to high world coffee price and in 1998/1999 due to significant devaluation of the Indonesian currency.
In 1996, the drama about forced evictions of coffee farmers out of protection forests and National Park using full-military operations with the helps of dozens of elephants. The military personnel forced all inhabitants residing in the protection forest to leave the houses immediately and the well-trained elephants were pulling out coffee plants, and also destroy the houses. The immediate objectives of this operations was claimed to ensure environmental protection, where people have to stay away from protection forest and the National Park. The tensions of conflict were very high, and both farmers and government apparatus have claimed to have rights and access to the forests. The eviction process has continued during the period of economic crisis, but then has eased substantially after the fall of President Soeharto and changes in political settings. There was a possibility local level politicians have mistakenly allowed farmers in Sumberjaya to go back and grow coffee in the protection forests, interpreting naively the principles of forest management for the welfare of people living around forest area.
In 1999, the new Government of Indonesia after the Reformasi established a task force – known as Tim Kopi – to carry out assessment on coffee practices in the protection forest and National Parks all over the country. The report of Tim Kopi (Gintings, 1999) suggests that about 115 thousands ha (out of 410 thousands ha) of the protection forest and BBS National Parks in Lampung Province have been cultivated for coffee farming. Recognizing that the evictions and military operations are not proper solution for conflict over land and resources, this task force emphasizes on local people-participatory process in forest planning, zoning and management of forest resources in general. In addition to problem identification and measurement on land degradation, forest conversion into coffee farming system, especially over protection forest and National Parks, Tim Kopi made significant policy recommendation to rehabilitate forest degradation in the province and to develop reforestation policy actions in general, and to encourage bottom up policy process and public participations in natural resource managements.
Generally, the conflicts and socio-economic tension between coffee growers and government officers relaxed as processes became more open and there was more interest in participatory planning and involving stakeholders in managing forests and conserving resources. After many decades of top-down regulation and central government ownership of large tracts of land, Indonesia’s forest policy began in 1998 to slowly evolve toward decentralization and stronger ownership rights for communities and indigenous peoples. The new law on forestry (Law 41/1999) includes provisions for areas of forest domain to be designated as Special Purpose Areas and customary forests. Neither of these designations provided for community ownership of forest land, but rather articulated as temporary leases or permits. In short, the legal provisions and implementation arrangements for the new forestry law have periodically changed since 1999.
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Although the central government, i.e. Ministry of Forestry continues to exert overall control over a large portion of the Indonesian land mass, some progress has been made in opening the space for negotiation between communities and the government. A principle of community-based forestry management contract provides one possible avenue for negotiated settlements of mutual benefit for government and community interests (Arifin, 2005). In additions, the new law on regional autonomy (Law 22/1999 and its improved version of Law 32/2004) grants local governments more power to manage their own resources. The local government of Lampung has announced the provincial decree 7/2000 on local tax and levies on non-timber forest products, including coffee. This institutional arrangement has been seen as formally recognizing coffee growers cultivating their crops in the forests.
In 2001, the Ministry of Forestry finally issued new policy on community-based forestry management (CBFM) or locally known as HKm (Hutan Kemasyarakatan) under Ministerial Decree No. 31/2001 recognizing important roles of community who have been living around forest area in managing forest resources. This decree provides temporary use rights of protection forest, by allowing people who have been practicing coffee farming with shade and coffee multisrata agroforestry and tapping other resources in forests. The key word of this new decree is participatory forest management and conservation of forest resources and the ecosystem, while also contributing the income of coffee farmers and people living around protection forest.
Initially, the HKm policy was not easily accepted by coffee farmers who have utilized the land in protection forests for a number of years, as they have had a “comfort zone” in coffee production activities with established networks of marketing and distribution process. On one extreme, coffee farmers who re-enter into the protection forest to take care of their coffee farms after being destroyed during the eviction process generally feel that they have new freedom after the Reformasi. This group generally possesses a general character of forest frontier, claiming that whoever made forest clearing in the first place and open up coffee farming has a right to utilize the forest resources. Any argument about forest boundary and zoning initiated by the government during Soeharto administration should no longer valid as the political setting and government administration is totally new. On the other extreme, coffee farmers who have bad experience during the eviction process generally do not trust any government policy related to land use and forest management. When they first opened up the forest to grow coffee, this group of people has paid any necessary local tax, retribution on non-timber forest products and levies on coffee distribution fee both formally and informally. The new HKm policy was only perceived as a strategy by government apparatus to collect money and impose new taxes on agricultural products. At the end, coffee farmers would not obtain any benefits from the HKm policy as it emphasize more on timber trees, instead of crop production.
After series of disseminations, demonstrations of the potential benefits of HKm contracts, the policy arrangements were eventually accepted by coffee farmers living around the protection forests. The operational principles of HKm contracts work as follows. Farmers groups interested in securing HKm contracts are required to form recognized farmers’ organizations and to follow management guidelines that local forestry officials approve as being protective of the watershed functions of the landscape.
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Five-year initial contracts can be extended to a maximum of 25 years. As of 2005, the area under HKm permits comprises 2100 square kilometers, less than 0.2 percent of the forest land of the country (Arifin, et al., 2008). As defined by the Indonesia forestry law, therefore, HKm permits are community forestry contracts in which the Indonesia government grants limited duration rights to forest estate land provided that the communities abide by management requirements. Van Noordwijk et al. (2007) regard the HKm contracts in protection forest areas to be a type of reward for the provision of environmental services, which can be evaluated by the extent to which they are realistic, conditional, voluntary and pro-poor.
Even though the coffee production offers attractive farm income and foreign reserves, the livelihood status of coffee farmers far behind the glamour expected income streams from coffee trading and processing. Coffee farmers have made only decent living from coffee agroforestry and in facts they are still below the international poverty line of US$ 2 per day (Suyanto et al., 2007). The studies also suggest that the education level of these farmers was also low and below the provincial average. Assuming that temporary contracts of tenure security in the protection forest could serve as a method of payment for environmental services by the government, these poor farmers had significantly provided environmental services for other stakeholders by establishing coffee multistrata in the upstream areas. Under the current multi-strata coffee agroforestry system, farmers are allowed them to earn income from the forest land while also preserving watershed functions similar to those of undisturbed forests. Interestingly, the income from these activities in state forests was also more equally distributed across communities than was income from private land. This suggests that these systems are also more effective in alleviating the poverty of those living on degraded forest land as well as providing more equal income distribution in the watershed (Suyanto et al, 2007)
Interestingly, the study also suggests that the income from coffee grown private land in the watershed and on the land under tenancy arrangements leads to more unequal income distribution. Wealthy farmers often extend their private land through purchase, which seems to have concentrated income from private land in the hands of fewer people (Suyanto et al. 2007). Moreover, land rights as a reward mechanism seem to work well in establishing and supporting environmentally friendly land management in protected forests. Insecure land rights were, and high transaction costs in implementing the HKm contracts and establishing multistrata could pose serious challenges in scaling-out and scaling up of the payment for environmental services into a wider context in the region and even in the country (Arifin, 2006). This implies that some existing supportive institutional environments could be developed to achieve better balanced on improving welfare of coffee farming practices and sustainable natural resource management. These are known as gotong-royong (labor share in common property), arisan (capital share periodically on regular basis) and Forum DAS or watershed forum which is formally a farmer group gathering or information share to obtain the tenure. Such a basis of strong social capital seen as the potential to develop sustainability principles of global trade in coffee and other agricultural products originating from developing countries.
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5. How the Indonesian Coffee Economy Interact with Global Initiatives
Emergence of global initiatives on environmental governance in the coffee sector somehow influence the course of business management in coffee trading and probably in some of farming practices, including harvest and post-harvest handling. Some coffee plantations, farmers’ associations, exporters and roaster companies have obtained certificates from Utz Kapeh, Fair Trade, and Organic. Some others are in the process of applications and verifications. As mentioned previously, Starbucks is currently implementing pilot projects on CAFÉ practices in South Sulawesi and North Sumatra. The Association of Indonesian Coffee Exporters (AICE or AEKI) is formally participated in the 4C process, despite the protest from their own members. After endorsement from the government, the 4C Secretariat has been actively organizing dissemination workshops about the 4C Code Matrix in Bali on January 2006 and in Jakarta on March 2007. Interestingly, individual coffee exporters are actively seeking more information about the 4C and willing to learn more the detail of such new regulations on the sustainability of the coffee economy. These exporters are fully aware with their long-terms relationship with coffee buyers at the international market. The pragmatic interests of not loosing the trade networks and the power de facto of international buyers in coffee supply chain have lead to softer positions from Indonesian coffee exporters. Some individual coffee processing companies have to certain degrees moved forward to adapt governance principles set by the 4C and other global initiatives to strengthen micro institutions of coffee farmers, regularly monitor coffee processing to ensure the quality demanded by buyers, develop business ethics by social corporate responsibility principles, etc.
In the late 1990s, a foreign-based development agency has assisted a group of coffee farmers in Gayo Highland, in a conflict region Aceh, to develop organic coffee, while maintaining the environmentally sensitive buffer zone of Gunung Leuser National Park. In addition to maintain the ecological function of the natural resources and preserve the environment, this Gayo Organic Coffee Farmers Association (PPKGO) are a basis of coffee farmers cooperatives, which also export high-quality Arabica coffee to mostly European and US destinations. In 2000, this PPKGO farmers’ group obtained a Fair Trade certificate from the Fair trade Labelling Organizations International (FLO). The price incentive system of the Fair Trade certificate and other technical support provided by the cooperative to members encourage these coffee farmers to maintain sustainable coffee production and resource conservation In the late 1990s, there was parallel action to empower coffee farmers in East Timor, in which Cooperatives Café Timor (CCT) also later obtain Fair Trade certificate (Transfair USA, 2004). Foreign-based development agencies such as USAID re-encourage the empowerment program for coffee farmers in Gayo Aceh, as part of Aceh-Tsunami Recovery Program.
The Indonesian coffee economy responds very well to the global demand on coffee, especially from European Union,, that requires Utz Kapeh certification. By the time of this writing, there are at least 15 coffee companies have obtained Utz Kapeh certificate, including six plantations of nearly 7000 hectares under the State-Owned PT Perkebunan Nusantara (PTPN) 12, headquartered in East Java. Most coffee companies with Utz Kapeh certificated are located in Aceh and Northern Sumatra, in additions to three coffee plantation companies located in East Java. PT IndoCafco is the only coffee company in
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Lampung that has obtained Utz Kapeh certificate for 1.500 hectare of coffee located in Tanggamus and West Lampung (please see Table in Appendix). As briefly mentioned in previous chapter, a new progressive cooperatives of KSU Arinagata in North Sumatra and the coffee plantation in Aceh, has also obtained organic certificate from the National Organic Program from the United States Department of Agriculture (USDA, 2007). In such a positive perspective, the Indonesian coffee economy has now entered the phase of restructuring process to adopt the corporate-drive traceability systems, as a important requirement of global market access in the future.
As a relatively new comer in such global initiatives on sustainability regulations, Starbucks coffee company has been to penetrate into important coffee production centers in South Sulawesi and North Sumatra. Starbucks has developed pilot projects on CAFÉ Practices in these two locations and encouraged traceability and price transparency in such an exclusive coffee supply chain. Smallholder coffee farmers and coffee exporters are now attempting to obtain third-party verification to ensure the requirements set by the CAFÉ Practices. Whether or not the mandatory requirements and exclusive coffee supply chain would lead to worsening asymmetry in coffee market structures are really the subject of further and in-dept studies on coffee marketing within the global initiatives of sustainability regulations.
Parallel to the story of Utz Kapeh certification, Rainforest Alliance certificate for shade grown coffee was obtained after the foreign-based development program in Aceh and foreign-based company in Northern Sumatra. For example, local government owned PD Genap Mupakat Gayo Specialty Coffee has been under partnership with Dutch government agency to encourage “bio-coffee” and reduce the amount of external and chemical inputs4. More importantly, this company also organize farmers group, where the members farm in the buffer zone of Leuser National Park. Endorsement of the local government is also given to establish Aceh Coffee Forum (Forum Kopi Aceh) to discuss problems and find solutions, both to increase coffee production and productivity, to improve coffee quality through harvest and post-harvest handling, and to conserve the buffer zone of Leuser National Park. Rainforest Alliance certificate is also given to UCC Lintong Mandheling Coffee Estate, a Japan-based UCC Ueshima Coffee Company with agricultural product trading PT Gunung Lintong and PT Tunggal Menara Jaya. This company grows local specific Arabica trees Linthong trees, under a shade-grown system of coffee plantation. The unique “semi-washed” processing, using virtually no water in removing the pulp, and specific drying process, this local species produces the well-known pure Lintong Mandheling coffee.
Finally, as the 4C governance principle is a business-to-business relationship and voluntary in nature, the Government of Indonesia has not yet taken any formal position to make the 4C Code Matrix and other global initiatives as mandatory. Nevertheless, the state-affiliated Indonesian Coffee and Cocoa Research Institute (ICCRI) has played important roles in developing and disseminating the principles of sustainability and environmental governance of such global initiatives.
4 “Genap Mupakat Kembangkan Biocoffee”. Article in Bisnis Indonesia, 25 July 2007
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Table 2. Performance and Progress of the Indonesian Coffee Sector in the Global Initiatives
Third Party
Important Dimension First Party Starbucks
Second Party SAI Utz Kapeh Rainforest Fair Trade Organic
Fourth Party the 4C
Introduction and interaction with public and society
Corporate sector-driven
Interaction with public and NGOs
Corporate sector-driven
Interaction with public and NGOs
Interaction with public and NGOs
Interaction with public and NGOs
Interaction with exporters and public
Pilot Project and networking process with farmers’ groups
Pilot project in Sulawesi and Sumatra
Not available After price drops in 2001
Post-tsunami in Aceh and North Sumatra
Post-tsunami in Aceh by development agencies
Pilot in Aceh, East Timor. Re-emergence post tsunami
Just recently introduced in 2006-2007
Modes of operation for market-link and certification
Encourage farmers groups or cooperatives
Encourage farmers groups or cooperatives
Not specific, but is likely direct links to companies
Encourage farmers groups or cooperatives
Encourage farmers groups or cooperatives
Not specific, but is likely direct links to companies
Not specific, but is likely direct links to companies
Progress on certification Not available Not available 15 companies have been certified
2 companies have been certified
One in Gayo One in Gayo Not available
Likelihood to integrate with the growing approach of environmental services
Very strong, Starbucks as captive buyer
Strong, NGO and public agency can play roles
Weak, but public agency can play roles
Very Strong, although starts with negative campaigns
Weak, but public agency can play roles
Weak, but public agency can play roles
Very weak, still in a very long process
Sources: Synthesized by the author from several sources
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Meanwhile, the Indonesian Chambers of Commerce and Industry (KADIN) as a parent organization of AICE has been actively facilitating the dialogues between international coffee buyers, domestic processing industries and coffee exporters, farmer groups and cooperatives and to certain degree the government agencies, i.e. the Ministry of Agriculture and the Ministry of Trade. ICCRI has then produced an initial Indonesian version of the 4C Code Matrix, even though some important elements of domestic interests such as specific local conditions of coffee plantations, communal labor arrangements such as gotong royong (labor share arrangement), and cooperatives movement such as arisan initiatives (capital share to strengthen market access) have yet to take into account.
The government of Indonesia is very much concerned with improving the coffee quality, especially from the smallholder producers in each coffee production center across the country. In this case, the government welcomes any governance mechanisms related to capacity building of smallholders, institutional development at the farm level, and strengthening competitiveness of domestic coffee industries. Therefore, governance issues in based on “partial interactions” between government bureaucracy and coffee exporter associations AICE that manage export quotas such as in the 1980s – creating substantial economic rents and political connections – should not be repeated in the current set-up of sustainability regulations and environmental governance. The new forms of global initiatives in coffee trade could strengthen the positions of coffee smallholders in the global value chain and encourage restructuring mechanisms to improve market structures and price transparency. As the coffee farming activities have close links with ecologically sensitive land resources, an innovative paradigm in the environmental services markets could stimulate more open and transparent dialogue between coffee farmers practicing sustainable coffee as providers (sellers) and coffee roasters, consumers and international community as beneficiaries (buyers) of the service. In additions, value-chain restructuring of the coffee economy could be intensified by improving coffee quality to comply with food safety standards, developing domestic coffee markets to increase value added at home and to develop effective demand in general.
Here are the points of analysis on the intersections between environmental governance and sustainability principles and the Indonesian context of coffee economy.
(a) Positions of coffee smallholders in the global value chain
Several important issues for smallholder coffee production system in the context of the global value chain include low productivity, low quality of coffee bean and low bargaining positions before the traders, coffee roasters and exporters. Specific problems facing coffee smallholders in Lampung also include land tenure security and unnecessary images as encroachers of the protection forests and Bukit Barisan Selatan (BBS) National Park. Initiatives at global level such as sustainability principles and environmental governance would not become positive incentive systems unless there are concerted efforts to solve the above problems. Principles on social, environmental and economic dimensions laid out in the 4C Matrix Code, several requirements to obtain Utz Kapeh
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certificate, tree-shade criteria by Migratory Bird to maintain certain degree of biodiversity in a land-sensitive production center, etc could become additional burden for smallholder farmers to comply with. Roaster companies and coffee exporters might be able to afford the certification costs and membership fees to become parts of these global initiatives. However, the opportunity for better market access, enhanced returns from production, and improved social conditions in the coffee producing industries would never come without serious efforts to materialize.
Smallholder coffee farmers in Lampung have been in situation of lack of capital and cash money to sufficiently afford production inputs and modern technology such fertilizers and pesticides. Poor coffee farmers in Sumberjaya also experience lack family labor as they cannot pay hired labor especially during land preparation and harvest times. Non-selected picking on coffee fruits (petik asalan) is commonly found in Lampung so that more green cherry is resulted in the coffee harvest. Selected picking for red cherry and strip picking for more ripen fruits would obviously require more labor and higher costs, hence the labor productivity (in terms of quantity per day) is reduced significantly. Smallholder farmers generally cannot afford to prepare concrete floors for coffee drying so that the coffee fruits are normally dried under the sun, and even on the road pavement. Therefore, the coffee quality from of coffee small-farmers in Lampung is quite low, hence the added value accumulated in coffee production process is quite small.
The argument to improve bargaining positions of these smallholder farmers by forming farmers associations has been well-known and occurred in Indonesia. The level of group dynamics, maturity of group leaders, and relationship between leaders and members differ significantly among coffee farmers croup across Indonesia. These factors determine the degree of farmer’s group roles in solving problems and taking challenges in coffee production and complying with global initiatives on sustainability regulations. Coffee farmers’ organizations have been in revival since the 2001, especially when these groups were collectively negotiating their rights with the local government to utilize protection forests for coffee production activities. More detailed explanation about this tenure rights is explained in the subsequent sub-heading on environmental services. These farmers groups have established well-defined codes of conduct and organizational mechanisms in taking care of their daily life problems, especially on coffee issues. This well-established institutional environment is really an important element to empower smallholder farmers to increase coffee yields through introduction of more advanced techniques in best farming practices, crop maintenance, land care, soil conservation etc.
In Sumberjaya, currently there is a good qualified forestry-extension agent residing in the location, whose responsibility is mostly on community forestry-related issues, management of agroforestry system involving coffee crops and timber and fruit trees in the watershed. By experience and practicing coffee farming, this agent is also very familiar with some issues in coffee production and distribution systems. These are initial capital to improve the coffee yield, harvest and post-harvest handling, to improve the quality of coffee bean, as well as increasing bargaining positions of coffee farmers to enter into “new culture” of global initiatives. In this case, smallholder coffee growers and small-scale roasters could set the reposition-strategy in a more competitive world of trading and global value chain.
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Recent tendencies show that global initiatives on sustainability and environmental governance have lead to coffee buyers to enforce the traceability principles, such as demanded by buyers at the international markets. These buyers could take advantages from production centers that have strong and dynamic farmers’ group and rural cooperatives, such as in Sumberjaya, Lampung. Any information regarding quality standard, pricing system of different grade of coffee, knowledge and technology transfer such as new coffee varieties, fertilizers etc are generally passed through group leaders, which then disseminated effectively to the members using their own communication mechanism. Community gathering, periodic informal meeting and “word of mouth” are among methods of exchange information among members of the group. Once these people see the direct benefits of becoming a member of farmer’s group, the sense of belonging to the group, code of conducts, and the programs could go strong, hence ensuring the group sustainability for the future.
Certainly, smallholder producers are in pressures to improve coffee quality as the certified products tend to dominate coffee trade in the future. However, not all small farmers and local roasting companies can afford to fulfill sustainability requirements and significant compliance costs set by the certification standards at global level. Global scale buyers and large-scale coffee industries might argue that these common tendencies might be in favor of those smallholder producers and roasters who are well-organized and more-capitalized, instead of unorganized and marginalized small coffee farmers. This argumen should be valid only under secular capitalist economic system, but hard to accept in Indonesia where basic problems of poverty and unemployment remain important political issues. Moreover, the distribution issues of global value chain system and social dimension of multinational firms which shall promote the creed of corporate social responsibility (CSR) could be seen only a green-washing mask which carries merely a significant amount of empty shell.
In other regions where farmer’s groups or cooperatives were just set-up for the sake of traceability requirement, the capacity building and institutional empowerment to these groups are generally very difficult. Experience of top-down formation of rural cooperatives (KUD=Koperasi Unit Desa) and poor images on KUD during President Soeharto administration become serious challenges in bridging global initiatives with local interests. The existence of national coffee-farmers’ association (APEKI=Asosiasi Petani Kopi Indonesia) which has a regional chapter in each province, is without exception. The difficulty to implement farm lobby at the level of policy decisions such as improving farmers’ bargaining positions before the traders and international buyers, has made such an organization difficult to be acknowledged as genuine farmers’ representative. Even though most farmers are well-aware of the need to improve the quality, increase market access, price transparency and fairness, any efforts to empower farmers through several groups or associations has to be handled with extra care. The short-term interests shown by local politicians to take advantages for any established groups might be counter-productive with the objectives to establish effective traceability mechanisms on coffee trade. Moreover, different interests from private sectors and development agencies, both domestic and international, sometimes lead coffee farmers to an object of development programs, which often operate in a single pathway to achieve the welfare objectives.
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(b) Compatibility with Environmental Services Approach
The global initiatives on sustainability regulations and environmental governance can be compatible with the growing approach on environmental services, where small farmers living in the forest margins (as providers or sellers of the services) could perform realistic, voluntary, but conditional economic transactions with fellow roasters, coffee consumers and international community (as beneficiaries or buyers of the services). As mentioned previously, coffee farmers practicing agroforestry system using various types of tree shades in Sumberjaya watershed in Lampung Province are the sellers or providers of environmental services. Domestic and international roaster companies and coffee buyers could play important roles in encouraging a process of self-empowerment so that poor coffee farmers can make the necessary decisions to build a sustainable future based on their resources, on improved technology and centuries of accumulated wisdom. In Sumberjaya Lampung – and in two other benchmarks area in the province of Jambi and West Sumatra – the World Agroforestry Center (ICRAF) has commissioned RUPES (rewarding upland poor for the environmental services they provide) program to develop working models of best practice for successful environmental transfer agreements adapted to the Indonesian context in particular and to Asian context in general.
Potentially, buyers of such environmental services provided by coffee farmers practicing coffee multistrata under agroforestry system include coffee roasters, consumers and international community. However, as the general concept of environmental service markets is still relatively new in Indonesia and in Asia region in general, these potential buyers of environmental services are not aware of the concept. Let alone, these buyers might be uncertain whether the payments or rewards would really lead to improved environmental services. In additions, as the institutions governing the interactions among these stakeholders have not yet developed properly, establishing rewards or payment transfers for the sellers is fraught with serious complications. This is especially true where poor people are very dependent on environmental resources. Under such institutional arrangements, the transaction costs of implementing rewards and payment transfers are extremely high (Arifin, 2006). In Indonesia, where buyers have to pay various taxes to the national and local government, exporter associations and/or putting funds aside for community development activities aimed at social responsibility, the new of environmental services markets might be viewed as another unwelcome tax or fee, contributing to high-cost economy in the coffee value chain.
The approach to treat the “conditional” tenure security to utilize protection forest land as rewards for environmental services in Sumberjaya Lampung is probably an innovative step to adapt the abstract of environmental service markets into more actions in the field. By the time of this writing, there are 23 farmers groups among the total of 36 farmers groups in Sumberjaya watershed– having an average 140 household members of each group – that have obtained permits to utilize state protection forest for a 5-year probationary period (Arifin et al, 2008). This probably coincides with the agenda of IndoCafco and Nestle, both operating in Lampung, to encourage partnership between
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private sectors and local farmers’ groups in Sumberjaya,5 as required in sustainability principles from Global Initiatives such as Utz Kapeh, Shade/Bird Friendly, Rainforest Alliance, Fair Trade, which also included in the 4C Code Matrix. Once these HKm farmers group have fulfilled the criteria and performance indicator of the community-based management (HKm = Hutan Kemasyarakatan), the tenure could be extended for another 25 years, before subject to next feasibility assessment. This step might also be seen as an ad-hoc strategy to cope with the lack of property rights and land tenure security, as a general problem of smallholders in developing countries.
Moreover, this approach could contribute to develop and empower smallholder farmers living in the buffer zones of National Parks, and to reduce direct pressures on the National Parks. The types of farming practices become central factors in determining the degree of dependency of a household on the resources of the adjacent national parks. Research in Kerinci Seblat National Parks, also in Sumatra, show that families with both rice-land and mixed gardens depend less on park resources than do rice-only farmers all other things being equal (Murniati, et al, 2001). Farms with only mixed-gardens are inter-mediate in their dependency on protected forest resources. In short, the research results tend to corroborate the view that agroforest systems are a superior land use system for buffer zones, as the systems might be expected to enhance the ecological integrity of a park in several ways. Moreover, sufficient income from coffee production and other marketable fruits and tree crops, for example, could alter the need for their harvest inside the park. Complex agroforestry systems may provide environmental services in the buffer zone itself – soil and water conservation, and the extension of biodiversity habitat out into the agricultural landscape in ways that are conducive to conserving the flora and fauna of the park (see Murniati et al, 2001).
Within an entry point of environmental service market, the roles of intermediaries in ensuring the sustainability principles are very important in providing links between sellers (smallholder farmers) and buyers (roasting companies, research institute, civil society organizations or international agencies) of the services. These intermediaries could play important roles in increasing public awareness; serving as a clearinghouse for information; training; capacity building; negotiating; monitoring and evaluation; resolving conflicts; absorbing transaction costs etc.. Intermediaries have also helped generate collective action in linking smallholder farmers with broader market, providing support for weaker members of communities to better address poverty alleviation or ensure that the poor are not made worse off.
In this context, economic valuation of environmental services becomes central point to ensure the workability of “market transaction” between sellers and buyers. If not
5 Actually, many organizations such as ICRAF, University of Lampung, and Watala have been involved in capacity building and institutional strengthening of partnership between farmers’ groups in Sumberjaya and private sectors and government agencies. In this partnership scheme IndoCafco is responsible to ensure market absorption, price guarantee, and marketing the coffee output from farmers in Sumberjaya (Kompas, August 9, 2006). While Nestle is responsible to provide technical guidance for best farming practices of coffee (Kompas, August 15, 2007). Further field verification is certainly required to give more accurate information on how the partnership mechanisms work and for how long.
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serving as a direct buyer, research organization could step in and conducting priority research on environmental service valuation in coffee production centers adjacent to state protection forests and National Parks. The really difficult challenge is how to promote environmental services that would achieve effective protection of a park that has a long and complex boundary, a reputation of being an ‘open access’ resource and its own complex history. Managing the national parks is not only conserving the wildlife and biodiversity hotspots, but also managing people living adjacent to the parks. Efforts on conservation would be more meaningful if they also provide significant economic and welfare benefits to local people. (c) Market Structure and Price Transparency
The pressures toward more sustainability regulations and certification of origin in coffee trade currently grow significantly in Lampung and in other places in Indonesia. The WWF controversial study claiming that about 45 thousand hectares of coffee area in Lampung is in the BBS National Park suggests that certification and traceability is among growing concerns within global coffee supply chains (WWF, 2007). Someday this certification of origin could become a necessary requirement of market access and possibly develop into non-trade barrier, which is counter-productive to the general welfare objectives. Major Coffee buyers in Lampung such as roaster companies Nestle and IndoCafco have obtained Utz Kapeh certification and some exporters have complied with global sustainability standards. In other places in Indonesia, Starbucks has been implementing CAFE principles that require price transparency along their supply chain, for example in Arabica coffee system in South Sulawesi and in North Sumatra. This traceability requirement has probably become an incentive system for growers and suppliers to develop a fairer and healthier relationship in coffee trading system.
However, the presence of Starbuck in South Sulawesi coffee production centers seems to show a power of a real single buyer (Neilson 2008), which might not be found excessively in Lampung. When farmers are very much dependent on single buyer such as Starbucks, coffee farmers and exporters have potential risks to produce only the “commercial specialty” coffee based on the quality demanded by Starbucks. As this global company requires continuous supply and quality consistency throughout the years, the production process and post-harvest activities would refer only to the Starbucks standard. At some point, this could become an incentive system for small farmers and domestic coffee chain to improve the coffee quality, expecting certainty and favorable price and guarantee of market absorption. On the other hand, however, this could become a threat of losing the specific local quality diversity of coffee which also has high potential local markets and loyal costumers for the local coffee (kopi kampung). In Lampung, such a phenomenon has not yet occurred this time, but sooner or later it will be there and local roaster companies then have no choice to buy only low coffee quality and possibly with higher prices. In other words, these local roasters are in risks to go out of business because of their inability to compete head-to-head with giant global companies which has strong links with and even operate directly in rural areas.
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Another dimension of global initiatives on sustainability regulations in the coffee sector is the governance and ownership issue of such initiatives. For example, the 4C Code Matrix and possibly other initiatives tend to represent the corporate interests which are mostly concerned with brand reputation, instead of making positive contribution to improve social welfare in producing regions. The voice of coffee producers from developing countries might not be well-represented in the initiatives, except probably the commitment to improve coffee quality to fulfill the sustainability requirements set by the buyers in developed countries. The governance system within the global initiatives and the ownership structures of such collective industry code for coffee are subject to further investigations regarding for example the decision-making process to handle strategic but sensitive issues such as price fluctuation, cases of retention, labor standards, human rights etc. More importantly, the global initiatives of sustainability regulations and environmental governance in coffee trade could be counter-productive for fair-trade principles if evolving into a new dimension of non-tariff barriers in buyer countries which are mostly developed nations.
One possible positive effect, if any, of the emergence of global initiatives is that such sustainability standards and environmental governance can be used as reference to develop domestic markets and increasing the coffee demand. Indonesia, and possibly many other developing countries, has experienced increasing demand on prepared food in the last six years. Average daily per capita energy consumption of “without prepared food” increased from 1.678 kilocalories (kcal) in 1999 to 1,775 kcal in 2005, while the consumption with prepared food also increased quite faster, from 1,849 kcal in 1999 to 2,008 kcal in 2005. In other words, the share of energy consumption with prepared food increased from 52.4 percent in 1999 to 53.1 percent in 2005. A similar trend is also found in daily protein per capita consumption, where the share of consumption with prepared food increased from 52.5 percent in 1999 to 53.0 percent in 2005 (see Arifin, 2007).
This increasing trend of prepared food consumption reflects a changing pattern as consumers increasingly demanded practicality, efficiency, and convenient products as more urbanized styles of living are also increasing. One might want to attribute this trend with increased awareness of better prepared food, high quality of hygiene, as the globalization has entered in the daily life on food consumers in Indonesia. Also, this trend could be associated with recent changes in business meetings and social gathering that takes place in coffee shops, convention centers, hotels, and restaurants, especially in urban centers. Local coffee industry views that the promotion of such a “coffee culture” could stimulate coffee demand domestically. Also, a wider promotion of specific local specialty coffee (kopi kampung) to the consumer centers could contribute to increasing demand for coffee in the domestic market. Further quantitative investigation on these issues is clearly an interesting research topic of the Indonesian coffee economy.
Finally, improvement of peace level in conflict regions such as Aceh and hopefully in Poso of Central Sulawesi could also benefit the development of Indonesian coffee economy. The emergence of domestic coffee industry is probably associated with emerging younger generations involved in coffee business, such as KSU (multi-purpose cooperatives) Arinagata in Takengon District of Aceh which produce “Arvis Coffee Sumatra” brand. Coffee productions from this cooperatives has obtained Utz Kapeh certificate, USDA organic, Just Control Union of Certification, and Fair-Trade etc. There
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is a tendency of growing pride among domestic traders and roasters in developing the trademarks for specific origins across Indonesia such as “Gayo Mountain Coffee”, “Toarco Toraja”, “Kintamani Bali”, and potentially “Lampung Coffee” and “Java Coffee”. Arabica specialty coffee has recently obtained more attention for a specific market segments in many big cities in Indonesia, which should benefit the specialty coffee production centers in highland Aceh, Toraja, Kintamani etc. In additions, the development of unique qualities and specialized niche markets using combinations of variety, location and processing technology would allow smaller traders and exporters to maintain wider market links with global value chain system. (d) Quality Issues in Processing: Mould Prevention, food safety etc
Buyers have set the coffee quality that has to be fulfilled by coffee producers and exporters, in which many smallholders cannot afford easily to comply with that kind of details. For example, before the global initiatives on sustainability standards, domestic roaster companies and exporters have been used to the quality standard set by ICO Resolution 420 (replacing ICO Resolution 407) that could also serve as certification of origin. Exported coffee is labeled as “S” coffee for fulfilling the following criteria: (a) for Arabica, not to have more than 86 defects per 300 g sample (New York green coffee classification/Brazilian method, or equivalent1); and, for Robusta, not to have more than 150 defects per 300 g (Vietnam, Indonesia, or equivalent), and (b) for both Arabica and Robusta, not to have a moisture content below 8% or in excess of 12.5 percent, measured using the ISO 6673 method. Exception is given to 12.5 percent maximum moisture content for specialty coffees that traditionally have a high moisture content, and classified as a specific grade nomenclature.
The “Certification of Origin” (Box 17, in the ICO Certificate) is also required to accompany each shipment of coffee and labeled as “S” if consignments of coffee comply with the target defect and moisture standards; “XD” if the coffee does not conform to the target defect standard, “XM” if the coffee does not conform to the target moisture standard and “XDM” if the coffee does not conform with either standard. Specialty coffees as described in paragraph 4 of this Resolution may be marked “S” together with their specific grade nomenclature even if they do not meet the target moisture standard. In general, increasing coffee quality and certification of origin have become new burden for coffee producing countries, especially where the majority of coffee farms are small-holder with land holding for about 2 hectares or less.
In short, as long as the certification process does not involve only a single buyer – or many buyers with single power – smallholder coffee farmers in Lampung would received potential benefits from this global initiatives. As mentioned previously, an efficient supply chain does not only depend on how short the marketing channel is, but also how the benefits and added value of coffee processing and trading are spread appropriately and fairly among actors involved. Those who have invested more on the “last resort” of their labor, capital, and trusts should receive more than those who have invested in lobbying skills and political resources.
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Regarding the food safety standards, recent efforts have been put on mould prevention and Ochtratoxin A (OTA) in Lampung coffee. Lampung coffee, like other coffee from producing region in Indonesia – is almost exclusively exported as green beans, and had been practicing for decades. Initial research to identify these food safety standards suggest that about 90 percent of coffee farmers in Lampung conduct harvest coffee without careful selection of red cherry (petik asalan) which is quite risky of OTA contamination. Issues of labor shortage, low harvesting skill, self targets to create quick economic returns on these cash crops have influenced the decision to harvest coffee even in early ages of ripen. However, the level of OTA contamination of Lampung coffee is 0.74 ppb, which far below the limit of 5 ppb, and about half of the sample coffee is no OTA contamination at all. The maximum OTA contamination in Lampung coffee is 2.7 ppb. At trader level, the average OTA contamination is only 0.36, which is much lower than that found at farmer level (Susila, 2006). Nevertheless, stakeholders’ awareness on OTA contamination and other food safety issues in coffee production and processing activities remain important and should become serious policy agenda in the future.
The remaining issues then include whether the value-added creations should be focused on small-scale producers or/and allowing local and small-scale processors to comply with post-harvest handling, better processing, and probably modern equipment. One should note that farm-level processing could be desirable but also involving significant quality risk. Meanwhile, large scale millings would probably more manageable in quality control and prevent further retention problems at the border. Furthermore, it is relatively simple for buyers to identify gross processing defects such as immature harvesting, delayed pulping, or mould coffee by a visual inspection of parchment coffee. However, since the demand for freshness is also very high from traders coming from outside the region, which is also mean green coffee trading, assurance of geographical origins of Lampung coffee could be employed. 6. Concluding Remarks: Some Policy Implications
This paper has presented the growing concerns on non-state regulation of agricultural trade, which translate to buyer-driven regulations of environmental practices in the coffee industry. The dynamics of coffee producing regions in Lampung Province in Sumatra Indonesia should provide exemplary case studies on how serious challenges in production system develop into more complex dimension of changes and restructuring process in the industry to such global initiatives. A negative campaign by an international NGO to blame illegal coffee producers for the loss of tiger in the Bukit Barisan Selatan (BBS) National Park in the province further complicates the problems, as the current coffee supply chain cannot guarantee the workability of price transparency, asymmetric structures of coffee markets, etc.
Buyer-driven regulations of environmental practices in the coffee industry which characterize most global initiatives have somehow restructured the supply chain in producing countries. The first and foremost evidence in this process of change is the growing tendency of exporters and domestic roasters to encourage coffee producers to organize as a group, as the monitoring system and traceability principle could be ensured.
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Because the Government of Indonesia has not yet taken any position of the growing concerns on global initiatives, facilitating the adoption of such initiatives by individual coffee roasters and exporters across Indonesia might contribute to the restructuring process in the coffee economy. Further, the public-private partnership consisting of the government, private sectors, research institute and non-governmental organizations should collaborate to develop the national code of conduct and to establish benchmarks for such adaptation of the initiatives into domestic context of the Indonesian coffee. This new domestic standard of environmental sustainability to develop domestic markets could encourage effective demand of the society.
Initiatives at global level such as sustainability principles and environmental governance would not become positive incentive systems unless there are concerted efforts to solve the above problems. Principles on social, environmental and economic dimensions laid out in the 4C Matrix Code, several requirements to obtain Utz Kapeh certificate, tree-shade criteria by “Bird-friendly” and “Forest-Alliance” to maintain certain degree of biodiversity in a land-sensitive production center, etc could become additional burden for smallholder farmers to comply with. Roaster companies and coffee exporters might be able to afford the certification costs and membership fees to become parts of these global initiatives. Another example is where Starbucks has been implementing CAFE principles that require price transparency along their supply chain, especially for Arabica coffee. This traceability requirement has probably become an incentive system for growers and suppliers to develop a fairer and healthier relationship in coffee trading system. However, the opportunity for better market access, enhanced returns from production, and improved social conditions in the coffee producing industries would never come without serious efforts to materialize. Certification of origin might become a necessary requirement of market access in the future and possibly evolve into non-trade barrier, which is counter-productive to the general welfare objectives.
Our research in Lampung shows that smallholder coffee farmers in the province have been in situation of lack of capital and cash money to sufficiently afford production inputs and modern technology such fertilizers and pesticides. Poor coffee farmers in Sumberjaya also experience lack family labor as they cannot pay hired labor especially during land preparation and harvest times. Non-selected picking on coffee fruits is commonly practice in the province as the elected picking for red cherry and strip picking for more ripen fruits require more labor and higher costs. Smallholder farmers generally cannot afford to prepare concrete floors for coffee drying so that the coffee fruits are normally dried under the sun, and even on the road pavement. Consequently, the coffee quality from of coffee small-farmers in Lampung is quite low, and the added value accumulated in coffee production process is quite small.
Major Coffee buyers in Lampung such as roaster companies Nestle and IndoCafco have obtained Utz Kapeh certification and some exporters have complied with global sustainability standards, including participating in the empowerment of coffee farmers’ organizations, together with government agencies, academic institutions and civil society organizations. Generally, coffee farmers’ organizations in Sumberjaya have been in revival since the 2001, especially when the groups were collectively negotiating their rights with the local government to utilize protection forests for coffee production activities. The farmers’ groups have established well-defined codes of conduct and
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organizational mechanisms in taking care of their daily life problems, especially on coffee issues. This well-established institutional environment is really an important element to empower smallholder farmers to increase coffee yields through introduction of more advanced techniques in best farming practices, crop maintenance, land care, soil conservation etc.
Farmers’ groups in Sumberjaya have developed initiatives to foster conservation of the protection forest by adopting coffee multi-strata practices under agroforestry system and implementing the government program of community-based forestry management (HKm). The coffee production activities take place in the buffer zone outside the BBS National Park, where small farmers are granted temporary tenure rights to utilize the protection forest, in returns to practicing coffee-multistrata with tree crops and timer in an agroforestry system mosaic. This mechanism could be seen a significant potential to develop micro-institutions at farm level which are compatible to sustainability standard and initiatives at global level. Other dimensions of environmental service markets are as a promising approach between poor coffee farmers who have practicing coffee agroforestry as provider and whoever the potential buyers of watershed services in the coffee producing regions.
The roles of intermediaries in ensuring the sustainability principles are very important in providing links between sellers (smallholder farmers) and buyers (roasting companies, research institute, civil society organizations or international agencies) of the services. These intermediaries could play important roles in increasing public awareness; serving as a clearinghouse for information; training; capacity building; negotiating; monitoring and evaluation; resolving conflicts; absorbing transaction costs etc.. Intermediaries have also helped generate collective action in linking smallholder farmers with broader market, providing support for weaker members of communities to better address poverty alleviation or ensure that the poor are not made worse off.
The remaining policy issues include the potential miss-links between the development of environmental service markets and global buyer-driven initiatives on environmental governance in the coffee industry. The approach of environmental service markets is designed as an alternative perspective on sustainable resource management, while global buyer-driven initiatives which are mostly concerned with brand image, security and continuation of coffee supply to the global market. Even, when coffee buyers at global level roaster companies comply with the ethical base of corporate social responsibility (CSR) to empower direct and indirect stakeholders who are poor, this mechanism could not be considered as payment of environmental services. Therefore, economic valuation is a necessary first step to develop environmental service markets.
Both environmental service markets and sustainability regulations in the coffee economy require continuous monitoring the compliance mechanisms that could contribute to environmental governance in general. Policy recommendation that facilitates a bridging process is really crucial to link bottom-up initiatives of institutional changes at farm-level and distribution organizations with top-down sustainability standard set private sectors at global level. In this case, intermediaries such as academic institutions, government agencies, and NGOs could play effective roles in achieving more effective sustainability regulations and better environmental governance in the coffee sector.
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Table Appendix 1. Utz-Kapeh Certified Coffee Companies in Indonesia No Name of company Coffee Farm Location Size
(ha) Period of certification
1 Aridalta Mandiri, CV Arabica Aceh Tengah 594 Sep 2007 – Sep 2008
2 Melati Group, CV Arabica East Java 1,786 May 2007 – May 2008
12 PTPN12-All Both A/R Total 6 Farms 6,727 2007 – 2008
13 Toarco Jaya, PT Arabica Toraja, Sulawesi 530 Des 2007 – Des 2008
14 Indokom Citra, PT Robusta Sidoarjo E Java 882 Aug 2007 – Aug 2008
Source: UtzKapeh Websites. http://www.utzcertified.org, accessed on January 12, 2008
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Table Appendix 2. USDA-Organic Certified Coffee Companies in Indonesia No Name of company Coffee Farm Location Size
(ha) Period of certification
1 Arinagata, KSU Arabica Takengon Aceh 619 2007 – 2008
2 PPKGO, dan Koperasi Arabica Aceh Gayo 300 2006 – 2007
United States Department of Agriculture (USDA). 2004. The National Organic Program of the USDA. http://www.ams.usda.gov/nop/indexIE.htm, accessed on January 24, 2008 Table Appendix 3. Rainforest-Alliance Certified Coffee Companies in Indonesia No Name of company Coffee Farm
Location Size (ha)
Certification Code
1 Genap Mupakat Gayo PT Arabica Aceh Tengah ID07-RA-1462-CO
2 UCC Lintong Mandheling Arabica North Sumatra ID07-RA-1463-CO
Source: Rainforest Alliance Websites. http://www.rainforest-alliance.org, accessed on January 18, 2008
