REPORT

Coffee Plantation growth and sector analysis

report for coffee plantation investments
Abstract:

“What goes best with a cup of coffee? Another cup.” –Henry Rollins
There are few industries today show the potential as done so by the $20 Billion
dollar coffee industry. In the ever-growing economy of India, coffee has for the
longest of time been a prime crop, primarily in the realm of export. Yet, the
factors that guide and sway this sector lay, for the most part, misunderstood.
From environmental causes oversees to the shifting lifestyles of the millennial
age, all play pivotal roles in the prospect of the sector. This paper aims to resolve
these factors, find analytical answers and substantial conclusion to the growth
of the coffee sector. This would entail a descriptive look into the coffee sector,
its divisions and the processes involved. Following this would be an analytical
analysis of the growth of the coffee sector over the last few decades, the factors
responsible for this and a proposed prediction of the future prospects of the
sector. Finally, the paper would look into the economics of the coffee sector, both
small and large scale. The result of this is to bring forth a proposed model to a
fruitful investment into the coffee plantation sector.

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Acknowledgment:

At the offset, I would like extend my heartfelt gratitude towards Mr. Sreekanth N
V without whom this analytical call would not be a reality. Furthermore I thank
all my friends and professors that gave me great insight into the possibilities and
prospect of this report. This opportunity has been one of unparalleled learning
and profound growth and to this, I am ever thankful.

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Introduction:

The roots of the finance-driven coffee seed in India can be traced back to the 18th
century with the British transforming south Indian forests to commercial coffee
plantations. As of today, over 75% of the production of coffee in India is done so
in the states of Karnataka, Kerala and Tamil-Nadu. This coffee grown primarily
in a two shade tier system on the leeward side of a mountain range in tropical
climate amounts to its unique flavour described by many as ‘having the flavour
characteristics of the Pacific Coffees’.
Out of the total Indian coffee production, 70% is exported while only 30% is
consumed domestically. The largest Importers of Indian coffee are Italy
(accounting for 23% of the export), Germany, Russia, and Belgium. There are
effectively two types of coffee grown in India, namely Robusta and Arabica
accumulating 60% and 40% of the country’s total production respectively. The
factors attributing to this distribution and subsequent causes are discussed
further on.
Currently, the Indian coffee industry accounts for 3.67% of the global production
in 2017. There has been a 12.7% YoY growth in terms of coffee export from India
between 2016-17 and 2017-18, leading to an increase in export earnings of
1439.58 metric tons in the same period. However, recent developments owing to
environmental and international factors have caused a fall in coffee production
and price in the year 2018-19, leading to a need for better models to predict the
nature of the coffee sector economics as proposed later on through the paper.
The domestic consumption of Indian coffee, though only penetrating the urban,
young demographic (for reasons to be elaborated on) has been on the rapid
incline. With a changing lifestyle to a westernized café-centric youth, coupled
with an increase in disposable incomes in this demographic, all lead to an
increase in the domestic consumptions. The surge in the digital age with
numerous publications on coffee has also affected its demand over the years.
The packaged coffee industry has been dominated by Nestle and Hindustan
Unilever, whilst the unprecedented growth in retail outlets have seen the advent
of brands like Café Coffee Day, Barista, Starbucks, Coffee Beans and Tea Leaf and
Costa Coffee.
There has been an increase in independent ventures in the past as well. The farm
to cup coffee culture is sustainable and is marketed as a high-end gourmet
product. Using distinguished brewing equipment and speciality coffee also helps
with product differentiation. This paper thereby aims to quantify, analyze and
substantiate the nature of the coffee sector in that it may propose a model better
suited to investments into this sector.

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Literature Survey:

The following is a literature survey on “Coffee Plantation growth and sector

analysis report for coffee plantation investments”.
Herein, a look has been made into the research conducted by various individuals
and the conclusions reached. The survey has been broken into different
subheadings with the research conducted, conclusions reached and comments
on further enhancements being discussed under each subheading.

Production:

Coffee production in India according to the Coffee Board of India stands at an

annual production of 275,225 metric tons of coffee divided over 450 thousand
hectares and employing over 659,000 people on a daily basis as of 2017-18.
Amongst this, over 80% of the production is concentrated in the southern states
of Karnataka (53.83%), Kerala (18.89%) and Tamil Nadu (7.83%).

Production in major states

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Sasubilli Paradesi Naidu in ‘Coffee Industry in India – A Historical Perspective’ [1]
offers a powerful look into the history of the coffee-economy, one of the primary
causes for this growth has been attributed to the post-liberalisation era
expansion backed by the government’s decision to allow coffee planters to
market their own produce, rather than selling to a central pool.
P. Malyadri in ‘Status Of Coffee Plantation In India: A High Time For Innovation
And Sustainability Towards Make In India’ [2] provides a holistic approach to
coffee production. Conclusions here brought forth the theory that climate change
results in the fall in quality of coffee bean, reductions in yield, increase in
incidence of pests and disease and increase in irrigation, fertilizer and pesticide
costs. This paper also proposed multiple methods of sustainable production of
coffee in a changing environment.
Maitreyi Menon in ‘What’s Brewing? An Analysis of India’s Coffee Industry’ [3]
offers a socio economic perspective to coffee production. A link was established
between the production of coffee and the pricing policy decisions, which could
be incentivized and disincentivized by support prices or taxation policy.
Moreover production and pricing are also dependent on international prices,
domestic inflation and exchange rates (Bibangambah, 2007).

Market History:

Coffee in India is an export driven economy, where around 70% of the coffee
produced is exported. Today, India exports coffee to around 45 countries. The
export earnings have increased 4139.58 metric tons between 2009-2010 and
2017-18. Italy is the largest export market, followed by Germany, Russian
Federation, Belgium and Turkey (Pazhanilath, 2002).
As described by Maitreyi Menon [3] the market history of coffee possess strong
links to fluctuations in the international market, thereby relying heavily on the
conditions in the primary coffee producers of he world such as Brazil. The
market has also been proved to be heavily influenced the supply chain of coffee
elaborated as:
• Growers
Most coffee is grown in tropical countries, where the temperature is stable for
most of the year. Most coffee producers are small scale producers. Many coffee
farmers around the world live in extreme poverty. Adding to this, since most of
them own very small plots of land, supplier power is very low in the industry.
Therefore, in some Latin American countries, farmers and plantation workers

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have formed their own cooperatives to improve the prices they receive. An
example for this is Mut Viz.
• Intermediaries
They usually buy coffee cherries from farmers, who are at the bottom of the
supply chain, and sell it to stakeholders who are ahead in the supply chain, like
processors.
• Processors
Coffee Processing is a complex and capital intensive process. The coffee cherries
are the base product which is converted into green coffee beans.
• Government
The involvement of government varies from country to country. In India, the
Coffee Board acts as a checking mechanism.
• Exporters
The Exporters main duty is to transport the coffee which they buy from the
producer to a different location.
• Roasters
This is when green coffee beans are transformed into roasted coffee beans. This
is a highly skilled profession. There are four types of roasts: Light, Medium,
American and dark. This product can be highly differentiated in niche markets.
Some retailers, like Starbucks roast their own coffee.
• Retailers
The job of the retailer is to sell the product to the consumer.

India’s Exports (2017-18)

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C. Upendranadh in ‘Coffee Conundrum: Whither The Future Of Small Growers In
India?’ [4] further elucidates the points of Maitreyi Menon by providing an in-
depth approach to the incentivizing and dis-incentivizing factors that guide the
coffee market, one such case may be the disincentive in the form of levying
income tax (on 25% of income earned) on the self-cured coffee which proved to
be a deterrent that discourage planters to engage in processing of coffee (ibid).
Curing units in the coffee growing districts are increasingly moving into buying
coffee and this development leading to an increase in the number of curing units
in recent past. Growers exercise option of selling coffee to curers through agents,
or get the coffee cured at a fee and store it to sell at a later date for better prices.
Access to global price information appear to be one of the critical factors
determining the decision of the grower(s) vis a vis spot sale or holding of the
stocks. Most of the export houses also have their own curing units so that they
process the procured coffee locally.
Another analysis made was that Coffee production is poorly responsive to short
term shifts in demand and this creates an endemic volatility within coffee
markets and it is in this context, futures trade is advocated as a mechanism to
hedge the sales against price fluctuations. Futures trade is also advocated as
there is more clarity in terms of quality parameters and grading of coffee and
thus acts as a price-discovery mechanism. However it needs to be underscored
that in a regime of regulated trade, futures trade at a global level has not
attracted the attention of financial speculators and it has seen participation
mainly from importers and roasters.

Domestic Trends:

Gholam Abbas Darvishi and Dr. M. Indira in ‘An Analysis Of Changing Pattern In
Area, Production And Productivity Of Coffee And Tea In India’ [5] provide a trend
analysis on the basis of land cultivation, total production and sale of coffee. The
arguments used primarily rely on the liberalisation of trade policies that in turn
influenced market structures and thereby coffee production. The change in
climate and methods of cultivation also caused a large shift in the production
and area of cultivation of coffee. The conclusion obtained was a broad view of
the coffee sector, influenced by a multitude of factors both short and long term
A more recent trend phenomenon has been noted by Kavya Dechamma K.M and
Karuna Devi Mishra in ‘Challenges And Problems Faced By Coffee Industry –A
Case Study Of Coorg Coffee Industries V/S Other Mechanised Industry
Attracting Youth’ [6] this being the fluctuations in a new generation of plantation
owners. The results proved the downfall of the coffee plantation sector in the

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younger generations. This owed itself to a multitude of reasons some of which
being Climatic conditions, Labour, Marketing and Maintenance. A reliability test
conducted on the given factors on a large scale survey further confirmed the
same.
Methods to reignite this industry saw proposed solutions as the formation of
Young Associations for a more stable income future, the use of a better educated
owner system to drive the plantation in an ever shifting economy, the
inculcations of better technology to rid the pre-existing notion of an outdated
lifestyle.
Maitreyi Menon [3] brings out a trend of high consequence being that of the
growing domestic demand for Indian Coffee. The rise of weternised lifestyle
coupled with an increase in disposable income and café-centric social outlook,
the domestic demand for coffee has been increasingly on the rise. India’s growing
middle class, and their penchant for coffee as a social phenomenon has led to
the rise of several retail stores like Café Coffee Day, Lavazza, Barista, Starbucks,
Coffee Beans and Tea Leaf and Costa Coffee. There has been an increase in
independent ventures in the past as well. The farm to cup coffee culture is
sustainable and is marketed as a high end gourmet product. Using distinguished
brewing equipment’s and specialty coffee also helps with product differentiation.

Domestic Consumption
However, it is also noted that demand fluctuations in the coffee industry are also
affected by the publication of literature on the health effects of coffee and
caffeine. Earlier, a very small amount of such research reached the public eye.
However, with the rise of digital media and the democratization of information
via the internet, it has become easier for such fads and trends to affect the
market demand for coffee (Varnam, 1994).

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The Small Scale Owner:

Small scale holdings may be understood as those below an area of 10 hectares.

Such holdings account for over 90% of the total holdings and produce over 70%
of the total output.
C. Upendranadh [4] summarises that in the current scenario, coffee Trade is
heavily concentrated and there are several limitations for the small growers to
engage in post-harvest processing and value addition. Given the inter-locking of
markets and long term relations that are built between producers and local
market agents, small growers more often than not opt for farm gate sale of the
produce (as parchment or dry). While the commodity accommodates the scope
for initial processing and value addition, there are several constraints that
prevent small growers to engage in those processes. They are capital intensive
and the staying power of the small grower is often tested in such cases.
Furthermore coffee Production in traditional coffee growing areas appears to
have reached threshold in several aspects. Coffee in new areas is supported by
the Coffee Board and other institutions and there need to reach productivity to
satisfactory levels. Conservation and coffee production practices are increasingly
coming under strain in several parts of coffee producing districts.
Labour shortage and limited scope for introducing technology (labour saving) is
repeatedly identified as one of the production constraints. It is estimated that
labour component accounts for almost 65 per cent of the cost of production.
However, these shortcomings although devastating in their first glance, all hold
viable solutions. The Address of some of the structural issues at the ICO level
through multi country agreements on sustainability and some amount of
regulatory norms on market operations. Realigning the role and mandate of apex
level promotional institutions like the Coffee Board. Time bound intervention of
judiciary and administration would help in resolving outstanding issues vis a vis
land tenure and land use policies (this is specifically applicable to Kodagu
district) and conservation. Innovative mechanisms for retaining the labour,
inducting fresh labour (from outside), training and professionalism in plantation
work may be developed. Here government’s proactive role has to be emphasised.

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 Holdings and their Sizes
Deepika M. G and Amalendu Jyotishi in ‘Assessing Risk And Risk Mitigation
Strategies Of Small Coffee Growers: A Study Of Kodagu District In Karnataka’ [7]
Provide an unmatched look at the intricacies of the challenges faced by the small
scale grower and provide an effective means of tackling these solutions.
At farm level the planter has to deal with various types of diseases associated
with coffee. This not only increases the cost of cultivation, but yield risk in such
situation is very high. Absence of adequate and timely extension service further
accentuates this risk. Policy and regulatory barriers related risks affect the
planters though these are not uniform across regions.
Global demand and supply situation reflected in London and New York
commodity markets determines the farm gate prices. Adding to this is the
volatility in exchange rate on which the planter does not have any control. In
addition, small growers also sell the product at a depressed price if there is
interlocking of product market with credit market. The buyer-driven supply
chain leaves the planter with little choice on price.

Model Proposition:

The following is a proposed model for “Coffee Plantation growth and sector
analysis report for coffee plantation investments”.
Herein, the model aims to provide a strategy of investment into the coffee sector.
The model applies itself to various segments individually to allow for a better
holistic approach towards the investment.

Location:

Coffee in India has for the longest of time been cultivated in the South Indian
states of Karnataka and Kerala. However, this mere generalization has played a
key factor in the recent downfall in coffee sector investment. The key to
overcome this lies in an analysis of the conditions needed for coffee growth.

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Coffee requires an all year round temperature of between 12 and 26o C with little
variations. An annual rainfall of 1500mm coupled with a spell of dry seasons
with no frost or extreme heat waves improve the growth of the plant. The soil
used is primarily that of sandy-loam and pH of range of 5 to 6.
Thereby with these factors in mind, one may find that coffee may be successfully
grown in regions such as Tamil Nadu, Andhra Pradesh, Manipur, Meghalaya, and
Mizoram which hold large untapped potentials.

Mixed Farming:

Coffee requires the use of shade trees to survive in India, furthermore, the
climate and soil conditions also often favor the growth of a number of other
spices. Most common amongst the shade trees are those of the fig, atti, rosewood,
silk cotton and so on. Secondary spices see the cultivation of cardamom,
cinnamon, cloves, nutmeg ect.
It is thereby easy to infer that the revenue earned can be supplemented with the
clever cultivation of these shade trees and spices. Apart from this, such an
approach also provides safety from short term fluctuations in the coffee trade.

Maintenance and Labour:

The maintenance factor of coffee estate investments are often the most
overlooked. Gestation periods often last between 3 and 5 years, abrupt changes
in weather can destroy crops, lack of pesticides can cause weeds to take over the
ground, such deterrents are often the cause for a fall in coffee investments.
However a closer look at these factors shows that they can be easily overcome
with a two factor approach of planning and persistence. Planning in coffee
essentially involves a foresight to the occurrences needed in an estate, right from
the planting of the seed to its harvesting and processing must be foreseen.
Furthermore, perennial activities of maintenance must also be such that they run
independently of the production of coffee, which is a neglected factor today.
Labour also has seen dramatic changes over the last few years, the prevalence of
day-workers over full-time resident workers demands a shift in the strategies of
an estate. Here, rather than the use of a monthly wage and long cycles of work, a
system of incentives and rewards for work done with respect to efficiency, time
and quantity can dictate the earnings of a worker. This functions not only as an
attractive income opportunity but also self-segregates the labourers into strata
of ability.

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Processing:

Beyond harvesting of the seed. The most efficient method of processing coffee
is that of dry or wet processing. Under these systems, the coffee beans are either
dried in the case of dry or fermented and washed in the case of wet.
The process of roasting seeds, though at one time a key factor, is today
outsourced to various agencies, this allows for a drop in maintenance of the
equipment needed to perform this task and moreover due to a number of
drawback imposed by the government, the outsourcing of the seeds sees the best
economical results.

Data Analysis:

A curious fact of coffee investment is that the productivity of coffee remains

relatively unchanged with regards to the area under cultivation. This constant
nature of the revenue earned per hectare allows for large flexibility in the choice
of the size of an estate. As an individual is not restricted by the drawbacks of
being force into an excessively large or small plot of land due to the economics
of the crop, one may opt for an estate best suited to ones ability thereby
improving revenue and living conditions.
To understand this better, the following data obtained from the Kodagu district
of Karnataka-

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This shows that the total cost of establishment incurred by small and large
plantations were 464947.47 Rs./ha and 442513.24 Rs./ha, respectively. In case
of small coffee plantation, the share of investment cost in the total establishment
cost worked out to be 58.90 per cent (Rs. 273869.85) and it was 58.13 per cent
(Rs. 257260.93) in the case of large farmers. It reveals that investment cost
incurred in small coffee plantation and large plantation was the same of the total
establishment cost.
The average yield reported in the study area for small and large plantation was
1620.2 kg/ha and 1619.8 kg/ha, respectively. It can be occluded that the
productivity of coffee in the study area found to be almost same for both type of
plantation. Returns from the plantation was also positive shown by the values
176586.92 Rs./ha in an average.

Specialization:

This consideration primarily concerns itself with the type of coffee grown.
Arabica and Robusta have the primary types of coffee grown and exported from
India. Though a safe route with lower risks, the growing of these types of coffee
confine a producer to lower revenues on account of the large supply all over the
country.

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This model proposes the cultivation of specialized forms of coffee. Types such
as Sheveroys, Pulneys, Manjarabad, Sln.9, Cauvery and Monsooned Malabar are
specific and limited in their region of growth, method of cultivation and output.
A venture into these forms of coffee though seemingly risky, see great potential
under this model.
There exists a strong shift to a westernized form of café-centric life amongst the
urbanized youth, taking advantage of this, it is evident that a venture into the
coffee sector seems profitable. But, coupled with this, providing a specialized
line of coffee offers a chance to gain in a market sector seldom ventured into.
With the help of the methods dictated in the model, one may, apart from an
export of Arabica and/or Robusta coffee along with a supplemented revenue
from mixed farming, develop a line of specialized coffees that can effectively be
sold directly to the consumer. The use of day-time labourers, better farming
techniques and effective planning, further allow for a plan prepared for all
outcomes. This may even, at a later stage, allow for the development of a small
café chain offering the specialized coffee.

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Conclusion:

The Coffee industry is unique in its analysis in that it holds a near everlasting
existence to the world. This very everlasting nature of coffee is the key to an
investment into the sector. Though a natural product guided and swayed by the
hands of natural factors and supply chains as substantiated throughout the
analysis, it is clear to see that these natural risks fall short when anticipated and
efficiently planned for. The sector in question offers a multitude of
opportunities, from export to local consumption to specializations, each
demonstrating a varied set of requirements and outcomes previously elaborated
on. This versatile nature of the coffee industry allows for large scale investments
into it, further encouraged by the constant nature of revenue per hectare. The
varying choice of location, methods of harvesting, distribution of revenue,
processing, mixed farming, specialization and so on grant a limitless scope to
individuals of varying aspirations towards a coffee sector investment. The aid of
the government coupled with the aforementioned factors give rise to a model
that allows for earnings in the coffee sector at all sections of land holdings, coffee
type and exports and local consumption.

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References:
[1] ‘Coffee Industry in India – A Historical Perspective’ by Sasubilli Paradesi Naidu
[2] ‘Status Of Coffee Plantation In India: A High Time For Innovation And
Sustainability Towards Make In India’ by P. Malyadri
[3] ‘What’s Brewing? An Analysis of India’s Coffee Industry’ by Maitreyi Menon
[4] ‘Coffee Conundrum: Whither The Future Of Small Growers In India?’ by C.
Upendranadh
[5] ‘An Analysis Of Changing Pattern In Area, Production And Productivity Of
Coffee And Tea In India’ by Gholam Abbas Darvishi and Dr. M. Indira
[6] ‘Challenges And Problems Faced By Coffee Industry –A Case Study Of Coorg
Coffee Industries V/S Other Mechanised Industry Attracting Youth’ by Kavya
Dechamma K.M and Karuna Devi Mishra
[7] ‘Assessing Risk And Risk Mitigation Strategies Of Small Coffee Growers: A
Study Of Kodagu District In Karnataka’ by Deepika M. G and Amalendu Jyotishi

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