IV. A. Coffee

Specialty coffee is one crop that meets the criteria set forth for this study: it is dominated by smallholders, has potential to go through an agricultural transition, and it has experienced growing demand in developed countries. A review of the history, production, structure of distribution, and markets for Indonesian coffee will be used to analyze this crop's potential. The influence of the international environment, perspectives from three U.S. companies, and a model of coffee production in Kenya will also be taken into account to form recommendations for the production and marketing of this important crop.

History

Coffee was one of the original crops produced in Indonesia for export. The coffee plant was imported to Indonesia from Malabar in 1699, and by 1725 coffee had become a commodity of major importance in Dutch East Indies trade. Over 1200 tons of coffee was exported to Amsterdam in 1725, an amount produced mainly by villagers who were required to grow it as a form of tax. Coffee became a dominant government-controlled crop under the Dutch Cultivation System, which required that coffee be grown in all suitable areas. With the introduction of estates, production grew to approximately 94,000 tons by 1885. After this peak, a combination of disease, pests, and unsuitable cultivation techniques led to a decline in coffee output. Production subsequently fell 60% over the next twenty-five years, and did not pick up again until introduction of the Robusta variety at the turn of the century. Robusta was a hardier, disease-resistant, high-yielding species, as opposed to the premium Arabica that was grown earlier. The world demand for Robusta was growing at this time, providing a market for increased Indonesian production. By the late 1920s, production surpassed the 19th century peak at 114,000 tons. During this time the present structure of the industry emerged, with smallholder farmers dominating production, and Sumatra's output exceeding Java's. The Sumatran smallholder has been the engine of growth in coffee production henceforth.

Throughout the 1930's production increased as a result of expansion of area under cultivation. This happened despite a decline in coffee prices; because of the smallholders low fixed and variable costs and abundant family labor, it was more beneficial for them to increase the area under production to compensate for the fall in price than to cut back. At the same time, the estate reaction to a fall in prices was to reduce the area under cultivation because of high fixed costs and reliance on wage labor.

During the Second World War, all traditional export markets collapsed and farmers returned to subsistence farming. After Indonesian independence in 1945, the nationalist regime neglected export industries and coffee recovered very slowly. Land under smallholder control increased gradually in the following decades, and beginning in 1970 growth accelerated on an average of 8%. This was due to both transmigration, a government program which relocated Javanese to the outer islands, and the favorable returns to coffee cultivation. Throughout the 1980s and 1990s, coffee production has remained in the hands of smallholders, and production of Arabica has seen resurgence due to the increased demand by the U.S. and other developed countries for high quality coffee.

Production

Though estates play a part, coffee production is largely based on the labor of about one million smallholder households that cultivate coffee on an average of 1.44 hectares per household. These smallholders generate 93% of total production, and the balance is made up by private estates in Eastern Java and government estates in Java. Coffee is rarely the sole crop grown, but provides the main cash income for about 5 million people.

In contrast to the rice sector, coffee yields have remained steady or gradually declined since 1965. This implies that increases in production have come largely from land expansion, and that intensification of production through use of fertilizer, pesticides, and efficient, sustainable farming has been limited. The following graphs verify that while production has increased in the last 25 years, it is largely due to land expansion:


Source:  FAO Statistical Database
 

The Structure of Distribution

The structure of distribution in the coffee industry is outlined in the diagram below:

This diagram is a very rough approximation of distribution; in fact it may involve many more steps. For example, there may be several importers or "dealers" on the import side of the chain. The farmer usually sells the coffee cherry, unfleshed, to a co-op or private enterprise, which prepares it for export. He may do some intermediate backyard processing, such as drying the cherry in the sun and hulling (separation of the bean from the shell). In spite of the damage to the bean, hulling may be done by the traditional mortar and pestle, or by spreading the cherries on the road and allowing the wheels of passing vehicles to do the job, or, preferably, by the means of a village huller. Then, the "green bean" (raw, unroasted bean) is sold to a local trader or exporter, which is usually a private organization. All exports of coffee are made by registered government-approved exporters.  The trader or exporter reprocesses the coffee to bring it to export requirements in accordance with the government provisions of the "A" quality standard for export coffee. This measure has been in force for approximately 10 years, and has led to significant improvement in the grades of coffee offered for export. The exporter mixes the beans and prepares them in large enough quantities for export. Finally, the beans reach the user through an agent, who connects the importer and user.

Markets

The coffee industry has remained an important generator of foreign exchange for Indonesia since the 1970s, and makes up over 10% of non-oil exports. The importance of coffee as an export has diminished as petroleum and manufactured goods exports have increased, but the crop has still contributed an average of $0.5 billion annually to export earnings since the mid 1980s. Typically, it accounts for over one-fifth of receipts obtained from the exports of agricultural produce.

Currently, Indonesia is the 3rd largest producer of coffee in the world, after Brazil and Colombia. More than 80% of Indonesia's coffee is exported to over 50 countries, the principal consumers being Japan, Western and Eastern Europe, the United States, North Africa, and the Middle East. The following graph shows the countries of destination for the majority of coffee exports since 1971.


Source:  FAO Statistical Database

The nature of demand for coffee in the importing countries has changed over the past 20 years. In the U.S., total consumption, averaging 2.4 billion pounds annually, is down 15% form 20 years ago. A factor in the changing tastes of coffee consumers is a shift toward higher quality but lower total volume. This translates to a higher demand for Arabica as opposed to Robusta coffee. For example, in the U.S., only 15-20% of imports are Robusta. The premium quality of Arabica is reflected in its price on the world market, which is more than twice that of Robusta. For example, the weighted average indicator price of a pound of Arabica from 1996 to 1998 was $1.89, and for Robusta it was $0.79.

Although imports of coffee have declined as a whole, higher demand for Arabica coffee is reflected in the growing presence of specialty coffee shops around the U.S. The number of small coffee roasters has jumped tenfold in the last 18 years, and there are more than 20 times as many coffee shops in 1997 as there were in 1980. Furthermore, that number is expected to double by the year 2000. This growth presents an opportunity for Indonesia to expand Arabica production. Now, Arabica is only 10% of production, and Indonesia is thus known primarily as the largest global producer of Robusta coffee. However, specialty coffee companies in the United States such as Allegro and Starbucks have recognized several Arabica coffees from Sumatra, Bali, and Sulawesi.

International Impact on Coffee

As a commodity with wide international demand, coffee markets and prices are directly dependent on international supply and demand. Thus, periods of growth and decline in Indonesia have been largely attributed to the situation of crops in other coffee exporting countries, rather than to any specific assistance given to coffee farmers or improvements made in the local industry. For example, in the 1980s, world coffee prices were high due to droughts and disease in Brazil, the world’s largest exporter of coffee. This caused a surge in coffee export revenue in Indonesia, as world supply was down and demand for Indonesian coffee was driven higher. For the 1998/99 harvest, Brazil's coffee output is expected to be unusually high due to excellent weather, recovery from a 1994 freeze, and strong prices in the last couple of years that led growers to increase area and improve orchard care. The surge in Brazilian supply will cause other countries to cut prices, which will adversely cut into export earnings for countries like Indonesia.

For more than 25 years, global coffee trade was governed by the International Coffee Organization (ICO) in London, an organization made up of both the coffee producing and consuming nations of the world. The ICO attempted to regulate global coffee supply and demand in order to keep coffee prices steady. Many coffee exporters grow coffee as a cash crop and rely heavily on coffee revenues for foreign exchange. If supply and demand is allowed to float in a free-market system, price fluctuations of coffee could severely impact these countries economies. Additionally, for several coffee-producing countries, there is no viable alternative to coffee, and thus they have no backup source of revenue if a price drop occurs. Under the quota system, ICO producer countries exported set amounts to ICO consumer countries, stabilizing both supply and demand and keeping prices within a predictable band. In general, quotas were set according to producing countries shares of world production.

By 1989, however, the ICO failed to implement quotas and price stability effectively. Coffee producing countries produced more than they were allowed according to the quotas, mainly in response to an increase in world demand. These countries found a market for their over-quota coffee in non-traditional markets, non-ICO members, and in whomever would buy outside of the quotas. This increase in supply led to a decrease in prices and consequently the demise of the ICO. The ICO no longer tries to regulate coffee trade, but functions as an information center for the coffee industry. It hopes to help stabilize prices by giving the market a clear picture of the coffee market through newsletters and publications. Without good, reliable information, prices are often based on rumors and speculation which can cause distortions in the market.

The breakdown of the ICO began with a two-year suspension of coffee quotas after a failure to modify the quota system in June of 1989. Indonesia was a contributor to the breakdown, since it contested the ICO’s quota proposals, arguing that they did not fairly reflect Indonesia’s potential. (For example, production in 1988 was 385,000 tons, and the proposed quota was only 220,000 tons.) Prior to the breakdown, Indonesia’s allotment was only 5.2%, against the 7% it feels is commensurate with its output. The board of the ICO argued this lower allotment was partially due to Indonesia’s reputation for selling poor quality coffee, and the lower demand for Robusta beans on the world market. Conversely, Indonesian officials claim discrimination is the root cause of the lower quotas, as the ICO is a Latin American-dominated organization that Indonesia contends is biased against Asian producers.

Additionally, the ICO’s 1989 proposals attempted to apply quotas to non-ICO members, primary markets for coffee produced above quota. This is evidenced by Indonesia’s export statistics in 1988, one year prior to the breakdown: 135,000 tons of coffee was exported to ICO member countries, and another 135,000 tons was exported to non-members. Although it was acknowledged that suspension of quotas would drive prices and export revenue down in the short term, Indonesian officials welcomed the suspension. "It’s better to get a suspension of quotas than to get a bad agreement," said Daryono Kertosastro, chairman of the AEKI. (Schwarz, 1989) Without the quotas, it was believed that Indonesia would be able to gain more of the world market share.

However, the realities of a free market system have led to oversupply and a substantial decline in prices, hurting farmers, processors, and exporters. In 1991, approximately 85% of Indonesia’s coffee exporters faced bankruptcy, mostly due to the fact that coffee prices on the international market dropped to their lowest point since the early 1960s, $0.84/kg. When the quotas were suspended in 1989, Daryono seemed to believe that despite foreign exchange earnings declines, Indonesia could "survive lower prices because coffee production from our farmers is quite cost efficient." (Schwarz, 1989) Apparently, the drop in coffee proceeds was more than Indonesia’s coffee producers could take – by 1991 AEKI and the Indonesian government were lobbying for a revival of the quota system.

The quota system has not been reinstated to date, and coffee prices have been volatile, varying from $0.50/lb. to a record high of $3.18/lb. From 1989-1994, coffee prices were relatively stable, varying from $0.50-$1.00/ lb. This low price caused a shakeout in the industry, as many coffee producers lost money at this level and either neglected their coffee farms, or if possible stopped growing coffee and started growing more profitable crops. Since 1994, however, prices have been volatile, due to adverse weather conditions, new inventory management systems of roasters, fear of shortages, stock market speculators, and the increased demand for specialty coffee in the U.S. and Europe.

Indonesia has not escaped this price volatility; in fact, because of its reputation for lower quality coffee it has had a more difficult time establishing its place in the free-market system. The Indonesian government has acknowledged this problem, as indicated by Minister of Agriculture, Sjarifudin Baharsyah. "We had best start to think about ways to become independent of prices on the international market. Because the marketing of coffee in the world is not always smooth and stable. Whatever the impact of international coffee price fluctuations will be detrimental to the farmers." (MacDougall, 1997)

Indonesian Policy

Both AEKI and the Indonesian government have also recognized the need to improve quality to international standards. Beginning in 1984, the government implemented a quality standard for export coffee which classifies coffee beans into six grades based on defects.  The adoption of these quality standards has significantly improved the composition of exported coffee, as indicted in the chart below:
 


Composition of Exports by Coffee Grade
(percentage of total)

Period Higher grades (1 & 2) Medium grades (3 & 4) Lower grades (5 & 6)
1984/85-1987/88 6 69 25
1988/89-1991/92 8 72 20
1992/93-1995/96 11 75 14
Source:  ICO Profile, Indonesia

Additionally, extension services and technical assistance have been in place since 1980 to encourage intensification, increase yields, and improve bean quality. An effort has been made to provide high-yield Arabica seedlings to replace Robusta at appropriate elevations, as well as providing high-yield Robusta varieties for replanting.

Despite these efforts, the above graph on Coffee Yields indicates that that yield improvement has been gradual and inconsistent.  This is not entirely surprising, since the government has put more resources into programs to improve coffee quality rather than productivity. Work on Arabica breeding is intensively pursued by institutions such as the Indonesian Coffee and Cocoa Research Institute.  Recently, a sub-station of this institute was established to manage a research program for Arabica at the Gayo Highlands in the Aceh province, where cultivation of specialty Arabica is very promising.  The government has also discouraged expansion of Robusta coffee in recent years through restricting publicly-owned bank loans to finance rehabilitation (and not expansion) of Robusta plantings.  The higher price of Arabica, combined with government efforts, have resulted in an increase in Arabica production and exports.  While Arabica coffee still comprises only 10% of exports, it is a marked improvement from 10 years ago, when this higher quality coffee made up only 5% of total exports.  During the same period, Robusta exports increased only 24%.

The quality improvement programs are partially a reaction to the fact that internationally, Indonesia has a reputation for producing lower quality coffee. This is one reason for Indonesia’s loss in market share in countries where coffee prices are high and demand is growing for quality coffee. The lower quality of Indonesia’s coffee has been attributed to the concentration of production by smallholders, who lack sophisticated farming techniques, and who use only rudimentary processing facilities. Also, beans are often picked too early due to lack of knowledge by farmers, a rush to pick beans before leaf rust sets in, and a desire to sell crops and raise money as soon as possible.

To address this problem, coffee auctions are becoming more common to encourage farmers to improve the quality of their coffee beans. These auctions, when done fairly, give smallholders a better bargaining position and indirectly encourage them to pick only red (mature) beans.  Also, farmers are encouraged to apply for short-term loans from the publicly- owned rural banks to assist their cash flow.  This would prevent them from harvesting immature and unripened coffee.  This, however does not always solve the problem, since interest rates make borrowing unattractive.

U.S. Retailer and Importer Perspective

According to three U.S. players in the coffee industry, Starbucks, Allegro, and Royal Coffee, Indonesia has a big opportunity at hand to increase revenue from sales of high quality Arabica coffee because of the weak rupiah and increasing demand for specialty coffee. Most of the Indonesian coffee these retailers (Starbucks and Allegro) and importer (Royal Coffee) purchase is from Sumatra, Sulawesi, Java, and Timor. The basic structure of distribution for these companies reflects that described above, and they all mentioned that the middleman plays an important role in the supply chain.

Scott McMartin, Green Coffee Buyer for Starbucks stated, "Depending on which island, the middleman or collector plays an important role in bringing remote coffee from producers to larger towns. The collector will typically represent a small or large network of small holding farmers. This role will likely stay constant for the near future."

Coffee buyers from these companies also all stated that the farmer receives prices based on world market and New York C market fluctuations. (The reference point for coffee pricing is typically the New York "C" market indicator price. Fine coffees command a premium above "C," while lower quality ones are sold at a discount to "C.") According to Bob Fulmer of Royal Coffee, although the farmers keep track of the market and price changes, "the level of education is low, so they are probably being taken advantage of." He commented that farmers usually get prices over the radio, but he was uncertain if or how the farmers reacted to the information.  According to the International Coffee Organization's 1998 report on Indonesian coffee growing (ICO, 1998), the real (inflation adjusted) price paid to growers largely reflects global price conditions.  However, in view of the extensive nature of production, with family time being the major input and some constraints on the use of fertilizers and chemicals, it would not be expected that price changes would have a very marked effect on output.  According to the ICO, previous studies have indicated that the response to price is low.  This reaction is further supported by the response to price reductions in the 1930s, when farmers increased production to compensate for the lower prices.

According to Kevin Knox, Senior Vice President and Coffee Buyer for Allegro Coffee, one of the problems with the fragmented structure of coffee-growing in Indonesia is that the farmers engage in "backyard processing," which adds little if any value to the coffee. Because they lack the infrastructure, skills, and capital to adequately process coffee for export, the farmers use very rudimentary techniques for washing, sorting, and hulling their coffee. The coffee must be re-processed by the exporters, and this gives them the ultimate control over the quality and value of the coffee.

Furthermore, Knox commented, there are powerful economic forces working against development of the smallholder coffee farmer. The control of the coffee industry falls into the hands of those that can add value to the coffee and prepare it for export. In Indonesia, this is most often the small group of exporters and large-scale millers. Because it takes hundreds of farmers to create a quantity of coffee large enough for export, it would be difficult to transfer this power to them. Such a large mass of farmers would need to be educated, mobilized, and empowered. "Farmers have no idea of what goes into making good coffee," said Knox. "The control of adding value is not with the farmer."

The Kenya Model

Kenya has developed a system to grow and market its coffees with very different methods from other countries, which has helped to make it "the producing country with the highest overall quality."(Knox, 1998)  Much like Indonesia, Kenya has a fast-growing population and limited arable land. Given these circumstances, the Kenyans realized that they needed a high return on each pound of coffee, one of their leading exports. Farmers wanted to ensure that their coffee demanded a consistently high price, which could only be done by creating a high enough quality coffee that consuming countries would compete with each other for access to each harvest. The slopes of Mount Kenya provided fertile ground and an ideal microclimate for cultivating Arabica coffee that generated this kind of demand. In addition to this, Kenya has some of the most sophisticated scientific research into coffee quality anywhere in the world.

Like Indonesia, Kenya's coffee is grown by small farmers with tiny plots of land. But while Indonesian smallholders inadvertently compromise the quality of their harvests through unskillful backyard washing and drying, Kenya's small farmers have organized themselves into cooperatives, each of which has a centralized wet processing facility with skilled operators. These co-ops produce small quantities of coffee, from 20 to 100 bags at a time, which are then auctioned off to buyers.

The auction system allows farmers to be directly rewarded for quality. Normally, importers, exporters, and buyers in consuming countries control the price of coffee, with the actual growers reaping only a tiny fraction of the final price. In the Kenyan system, each parcel of coffee produced is delivered to a centralized mill in Nairobi where samples are drawn and tasted. Expert tasters rate each sample on a 1-10 scale for flavor, acidity, and body, and growers (but not prospective buyers) receive a copy of these results. Prospective buyers are then sent samples of each coffee to taste and evaluate prior to the next week's auction. At the auction, the bidding sorts out the lower from the higher quality coffees. Sometimes, the better lots go for two or three times the price of average offerings. The money goes directly to farmers, who run small but excellent operations. They all contribute to the Kenya Coffee Board and Mill, which conducts research and grading, but they still receive 86% of the total price obtained by their coffee.

The possibilities for implementing this model in Indonesia would be limited by the expanse and geographical separation of the Indonesian coffee-producing areas (North Sumatra, South Sumatra, Sulawesi, Bali, Java, Timor, Irian Jaya) which are on different islands or do not have an easily accessible central location such as Nairobi.  Also, Indonesia is subject to a high degree of corruption, which may interfere with the grading system if bribing occurred between graders, farmers, and buyers.  One solution to mitigate these problems is to implement this type of program on a smaller scale.  In fact, farmers in East Timor have organized into cooperatives similar to those in Kenya.  According to Sam Filiaci, of the National Cooperative Business Association of Indonesia (NCBA), all farmers in East Timor (13,000 families at this time) are organized into 16 primary and one secondary cooperative.  They do all of the procurement, processing, and export of the coffee.  The secondary cooperative federation in Dili has the export license and receives the export payment proceeds.  These small farmers use wet-processing, which is more appropriate for Arabica coffee.  This technology was brought to the small farmers through the NCBA.  According to Filiaci, the farmers do not need to utilize credit because it is a low input/ low output farming system. About 75% of the coffee produced is Arabica, and 60% of the demand is the U.S. specialty market.  The other major importers are in the main European, North American, and Japanese markets, and the co-op farmers market their coffee directly to the importers.

It appears that the cooperative nature of the Timor system is similar to that in Kenya.  However, it lacks the tasting/rating and auctioning processes.  The benefit of the tasting/rating system is that it allows farmers to understand more about what is required for a "quality" cup of coffee.  Also, they know the value of their coffee before it is auctioned off, so they are not undersold.  Since Timor coffee has gained a good reputation internationally, it commands a higher price, but the farmers do not know on what elements their coffee is being rated.  Also, prices are not differentiated through an auction, so the prices are determined by importers and exporters.  In short, the Kenyan system gives more control to the farmers by educating them about the quality of their coffee through objective and market forces (tasting/rating and auctioning.)

The Timor case may be an excellent opportunity to implement a "pilot" of the Kenyan model since it has the cooperative structure already in place.  To implement the model, the cooperatives would need to have a tasting/research facility, which could administered by the NCBA and AEKI.  By involving the AEKI, several exporters could learn the process of the model so that it could be adapted and implemented in other areas.  The AEKI would be an ideal partner since it has 12 provincial offices in major producing or exporting centers throughout Indonesia, and it already does extensive work on improving productivity, quality, and marketing of smallholder coffee.  It also is an important counterpart for the Government in dealing with coffee trade and development.

The benefits of implementing this model include a higher priced coffee and higher returns to farmers, elevated international reputation of Indonesian coffee, more highly educated farmers, incentives for farmers to grow the highest quality coffee, improved processing methods, and a more stable income for farmers (i.e. incomes would not be as influenced by coffee prices on the world market).

Although recent cost information was not available, the benefits of converting from Robusta to Arabica coffee growing indicate a substantial revenue increase. The annual average price of a kilogram of Arabica from 1996 to 1998 was $4.16, versus $1.74 for Robusta.  Currently, there are approximately 78,000 hectares of land under Arabica cultivation, and over 1 million hectares of land under Robusta cultivation.  Although yields of Arabica are generally lower than Robusta (due to intercropping, fragility of crop versus Robusta, and stricter quality specifications), the economic gain of growing Arabica is substantial. Using a yield rate of 300/kg per hectare for Arabica and 400/kg per hectare for Robusta (ICO, 1998), if 25% of Robusta crops were converted to Arabica, the increase in total revenues for Indonesia would be approximately $151 million, or an 18% increase.  On the individual farmer level, the increase would be even greater, as indicated below:
 
Arabica Robusta
Land Held 1.4 ha 1.4 ha
Yield 420 kg 560 kg
fob price per kg $4.16 * 77%=$3.20 $1.74*92%=$1.60
Total revenue $1344 $896
Rupiah (Rp7500=$1.00) Rp 10,080,000 Rp 6,720,000
Difference 33% increase
(Note: fob percentage is based on "1995 Farmers' Share of fob Prices" from South Sulawesi, Dinas Perkebunan (Provincial Estates Office) .  Percentages will vary by region, depending on transportation costs and number of middlemen.)

In order to understand the real advantages of Arabica production, a cost structure would have to be determined as well as the feasibility of converting Robusta to Arabica, since Arabica must be grown at higher elevations.  It is probable that the upfront costs of conversion are high, which would include replanting costs, new seedlings, and wet processing facilities.  Wet processing is not necessarily a large investment, however.  For example, Sumatran smallholder Arabica coffee farmers apply the wet process using simple hand pulpers for pulping cherries and wooden or bamboo boxes for the fermentation and washing of the parchment coffee.  The coffee beans are totally sundried.  More capital intensive wet processing includes the use of mechanical pulpers, washers, and dryers.

Solutions and Obstacles

There are both internal and external forces that have influenced smallholder coffee farmers. Externally, world supply and demand and price volatility make coffee growing a risky crop to depend on. On the positive side, the increase in demand for specialty coffee has created an opportunity for Indonesian farmers to increase production of high quality Arabica coffee, and receive higher returns for it than for Robusta.

Internally, the smallholder has been neglected, first by the Dutch who focused on plantation production, then by Indonesia’s first president, Sukarno, whose primary focus was on nation-building rather than the economy, and finally by Suharto, whose agricultural priorities were in rice self-sufficiency rather than cash crops. Understandably, in the early stages of his presidency, Suharto was pressured to focus on rice in the name of political stability. However, this inattention was detrimental to smallholder farmers, who fell behind in technology and whose yields declined steadily. The combination of both the external and internal situations has put the smallholder coffee grower at a disadvantage, with outdated farming techniques, lack of capital, and an international reputation for lower grade coffee production.

Since the 1980s, however, it appears there has been some improvement with policies geared towards coffee growing. Suharto’s attention turned to external markets and exportable crops, particularly since self-sufficiency in rice was achieved. The recent rise in demand for specialty coffee, (particularly Arabica) has encouraged the government to assist in the development of exportable quality beans to become a more viable contender in this type of coffee trade. Most of the policies have been more beneficial to plantation growers than smallholders, as they have the capability to produce higher quality beans. However, smallholders have received some efforts at assistance, particularly subsequent to the lifting of international quotas that hurt smallholder revenues. This assistance was likely due to the domination of smallholders in Indonesia’s coffee production, which were too great to be ignored if Suharto truly wanted to improve the reputation of Indonesia’s coffee on the world market. Assisting in the development of these crops also served other goals of Suharto, such as stemming urban migration.

Despite efforts to improve the lot of coffee farmers, there are some aspects of the coffee industry that cannot easily be changed. Supply and demand on the world market, the economies of scale required by large importers, and unpredictability of weather patterns will remain features of the system that are somewhat unalterable. The chain of distribution is also a difficult structure to change, although from Indonesia’s perspective, the smallholder could potentially increase both his power and coffee quality by implementing a system modeled after Kenya's.

The trend towards smaller roasters in the U.S. provides a market for smaller quantities of coffee, ideal for cooperatives of small farmers. By vertically integrating through some of the middle links in the chain, as in the cooperative structure, farmers can add value to their coffee, have closer access to markets, and understand what price their coffee deserves. However, this can only be successful if farmers have the ability to increase crop yields, quality, and production.

One alternative to accomplish this is for smallholders to work closely with millers and processors in order to understand what goes into ensuring a consistently high quality coffee crop. This initiative would be facilitated if designed by an authority, such as AEKI or Agrobank, which could assist in building relationships between the two parties. Once smallholders increase the quality of their coffee and learn processing techniques from millers, groups of smallholders could cooperatively become millers and processors themselves, and sell directly to the roaster in the consuming country. This second initiative would take a great deal of coordination, skill, and initiative by smallholders, and of course would depend on the demand for smaller batches of high quality coffee on the world market.

Since smallholders dominate coffee production, it seems that they are the most likely targets for raising standards and quality. Some of the government’s initiatives, mentioned above, do seem to be geared towards improving the quality of smallholders’ coffee, such as replacing low yielding varieties with high ones, but they do not give a sustainable advantage to smallholders. In order for smallholders to survive, they need to have the technology and farming techniques to compete on the world market. They also would be in a better position if they had more power in the distribution chain. Both of these improvements could be achieved through a cooperative/miller relationship described above.

A remaining obstacle is access to capital for smallholders. This is where either private lending institutions or government banks would need to step in. If government statements about re-investing in the cash crop sector are valid, government financing is a possibility.  The IMF and World Bank have also encouraged a re-focus on agriculture.  The IMF's $33 billion rescue program abolished restrictions on the import and export of agricultural commodities.  The World bank has offered a $400 million loan to rejuvenate agriculture.  The concern, according to Dennis de Tray, the bank's country director, is the willingness of the government to try new ideas (Far Eastern Economic Review, 6/4/98).  De Tray says that the government needs to free up fertilizer and seed distribution, now still largely in state hands; accelerate the process of handing over irrigation systems to local water-use associations; and encourage universities to become more active agricultural research and training schemes.

Other national projects are aimed at boosting the rural agricultural sector, such as a $400 million investment by the Agency for Technology Application and Study (BPPT).  This money is to be used to introduce technology into Indonesian villages for three to six months.  In nearby Singapore, Rabobank International  is offering an export funding scheme for agricultural commodities from Indonesia to abroad.  The bank is also planning to act as an intermediary with overseas buyers.  Through a partnership with PT Sucofindo, the bank would ensure inspection of  the quality and quantity of export commodities.  This would help convince buyers to place orders, since the products have been duly inspected by a trusted institution.  Foreign investors are also eyeing the agricultural sector. After an agribusiness exposition in Jakarta help in July of 1998, at least 15 domestic and foreign investors expressed interest in investing in Indonesia's agriculture sector. (Asia Pulse, 8/20/98).  The Head of Agribusiness in Indonesia's Ministry of Agriculture, Ato Suprapoto, stated that the future prospects of investments in agribusiness will be bright in 1998, because this sector has potential for national development and is insufficiently affected by the economic crisis compared with other sectors.  Investments thus far include development of cassava in Sumatra by Netherlands investors, and investment in Abaka banana plantations by other foreign investors.  Specialty coffee would also be an ideal crop for investors to develop given its potential for highly valued exports.

A final unique opportunity for Indonesian smallholders is production of organic coffee. Most of the country's coffee can be classified as organic because smallholders rarely use chemical fertilizers and controls. This is a growing segment in developed countries, and may provide a unique positioning for smallholder to market their coffee.  Allegro, being the U.S'  largest organic coffee company, has found Indonesia as a good source of organic coffee. An obstacle to marketing the coffee as organic is obtaining organic certification.  This is a costly and cumbersome process, and is happening mostly with the assistance of U.S. importers such as Holland Coffee Company and Forest Trade.  Farmers have not grown organic coffee as a reaction to increased Western demand; it is an outcome of prohibitive prices and lack of access to pesticides and fertilizers.  Thus, the concept of marketing coffee with an organic benefit, including the regulations involved, is and area unfamiliar to coffee farmers.  Continued education from Western companies as well as assistance from AEKI and ICCRI could help farmers more fully capitalize on this opportunity.