Benefits, justifications and risks

Cash crops markets and marketing

Traditional crops. The present situation and the future prospects of the international market of coffee and tea, and the constraints and opportunities that Rwanda faces in these markets have been summarised in Chapter IV, and analysed in details in Working Paper 6 and 12. The conclusions of the project formulation mission have been reviewed and commented upon by a TWIN specialist consultant at appraisal. This section discusses the conditions that the project supported CPMCC, and the NTC must meet in order to be financially viable on a sustained long-term basis.

Coffee. The viability of the proposed CPMCC rests on two basic assumptions: (i) that the quality of their products will be such as to command a price comparable to that of the very good arabica coffees produced elsewhere in the world, and (ii) that the management of the companies will be able to establish a favourable trading environment, building up the confidence of buyers regarding the quality of the products and the ease of doing business with the Rwanda suppliers, that is, the international reputation of the project supported exporters. TWIN will test and grade the quality of the products, negotiate FLO certification for the grades that meet FLO standards, and arrange for the special linkages with the FLO network trading companies that will have a first option on the purchase of the FLO certified lots at FT guaranteed prices for trading under true labelling in the speciality markets overseas. TWIN will also assist in promoting the image of the coffee produced by the CPMCC among coffee buyers other than FT organizations. It is expected that at full development, the share of the total project supported produce sold at FT prices may be up to 30% of the total, that is, about 375-400 tons per annum.

The size of the coffee market of the entire FLO network in 2001 was about 15 000 tons, growing at 12% per year. Assuming a slower growth rate for the future (7%), it will expand to over 22 000 tons by 2010. The sale of 375 tons from Rwanda by that time would be equivalent to only 2% of the volume of the FLO network World business in coffee, and to 25% of the volumes handled by the TWIN associated trading company, Café Direct, also assumed to expand at no more than 7% per annum. Café Direct, having to cater for its many partner cooperatives in 16 other countries, from whom it now purchases about 1 000 tons, may well be in a position to purchase between 150 and 250 tons from its Rwanda partners. The balance of the FT grades produced should not be difficult to sell to other trading companies of the FT network. The following table shows the projection of the FT grade output of the four project supported coffee enterprises used as a possible scenario of project implementation.

Table 16: Annual Phasing of the FT Standards Coffee Produced by the four CPMCC Supported by the Project (tons)
Compared with projected sales of labelled products by TWIN Trading and the FLO network

The balance of the produce of the CPMCC should consist to a very large extent of grades that can still be sold at a premium price. The quantities that do not fall in this category would depend on the effectiveness of the quality control exercised by the processing companies on the fresh cherries purchased from the farmers and during the de-pulping and hulling process. Since the companies policy will be to reject all cherries that do not meet set standards, and to screen carefully the products at different stages, it can be reasonably expected that no more than 5-10% of the total output will be of “standard” quality, and that no “ordinary” coffee will be produced. The companies’ pricing policy for the fresh cherries will provide reasonable incentives to ensure top quality deliveries by farmers. The independent grading of the produce by TWIN and OCIR-Café (under its new mandate) will monitor the companies performance and improve the chances of a fair “price for quality ratio” at the time of negotiating sales. In addition, it is envisaged that at least two of the areas where project supported CPMCC are established may be converted to organic coffee producing areas. TWIN has experience of organic coffee production in nearby Uganda, and feels confident that this can be done. Provided net positive returns to organic coffee production is demonstrated, the project supported companies will have a further opportunity to market their coffee at premium prices, entering a larger market than that of speciality products.

The present size of the of the world trade in high quality arabica, a large share of which is of Colombia origin, is about 780 000 tons. Demand is expanding slowly, but slightly faster than supply. The incidence of the non-FT standard share of the production of the project supported companies, some 800-900 tons, in that market is minimal. However, the best Rwanda coffees are not comparable with Colombia Mild products, because of technical differences in flavouring balance. Nevertheless, despite this drawback (less flexibility for blending), there are chances that the objective high quality will be recognised in specific market niches. In this connection again, it is expected that TWIN will be able to help by providing access to buyers associated with the FLO network who do not deal exclusively in products sold in the speciality markets. Ease of doing business is, along with constant and reliable quality, the second most important factor of developing remunerative market channels. Good management of the coffee companies, non interference by government, other public agent, local or national external organizations, efficient and speedy banking and costumes operations, will help a good deal to sell the CPMCC output at remunerative prices.

Currently, the FT organizations offer to their associate cooperatives of producers a minimum free on board price of USD 2.78/kg, for the share of the produce that is of the required quality. This price compares to the USD 0.90/kg (some 20 cents less than the New York Future C equivalent to USD 1.09/kg) paid to OCIR-Café. International buyers of quality products are expected to buy at least some of the produce not purchased by FLO members at prices not far below the minimum FT price. Nevertheless, the price assumed for the non Fairtrade uptake is considerably below that level.

The financial projection for the coffee processing enterprises has been based on the following assumption about “free on board” (fob) and “free on truck” (fot) prices and share of produce by quality:

Table 17: “Free on board” and “free on truck” prices

The average price of the share of the output that would not be purchased by FT organizations would depend on the structure by quality of the produce. In most cases there will be aspectrum of different qualities, each valued differently in the market. As already discussed, the expectation is that the bulk of the non-FLO standard products will be of high quality, the share of “standard” coffee will be marginal and no “ordinary” coffee will be produced. Nevertheless, prudence in price projections is mandatory. Accordingly, the average fob price used (USD 1.42/kg) is only a little higher than the recent New York C quotations.

Tea. The future for tea looks less unfavourable than for coffee. In the case of tea as well, quality makes a significant difference. Good quality tea prices fare, and are expected to fare in the future, much better than the average. From this point of view, Rwanda has a distinct opportunity to exploit, since Rwanda CTC tea is considered among the very best in the world. This reputation, which is a critical factor of the financial viability of new investment in the sub-sector, is being restored after some decline in the quality of OCIR-Thé products after the 1994 war. At the moment, not all tea factories in Rwanda are back to the pre-1994 level. Nevertheless, OCIR-Thé has managed to sell at fairly good prices in 2001, despite the drop of the average tea quotations by 25% in 2000. This confirms, that price volatility in tea is less of a problem for good quality products than for average or low quality products.

The judgement of experts and traders consulted by the project formulation mission coincides with the view of the GOR that, provided that country production is brought back to the level of quality of before the war, Rwanda tea will be paid top prices. Some traders felt that most Rwanda teas can fetch even higher prices than the best Kenya teas. The Nshili area has the potential to be among those, provided growers apply the correct pruning and harvesting practices, fresh green leaves are delivered rapidly to the factory, and adequate processing immediately follows. A similar potential exists in the Mushubi area.

As in the case of high quality coffee, the tea produced at Nshili will include some of the very best, some of the good quality tea, and some of the less good quality that will be sold in the domestic market. Products falling into the first category are expected to be a larger share than in the case of coffee. The following price structure is assumed in the financial projections:

Table 18: Price structure for financial projections

The quantity produced by the Nshili factory (1 800 tons per annum) is quite small in relation to the size of the international market for top quality tea. There is expecting to be no problem in disposing of such quantities at the projected prices.

New cash and export crops. This component is not specifically designed. It will be implemented on the basis of knowledge about a number of different opportunities that will become apparent during project implementation, especially once results fo research into new crops and the Cape gooseberry pilot project are evaluated.

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