The sub-sector context

The market of Rwanda traditional export crops

The present situation and the future prospects of the international market of coffee and tea are discussed in Working Paper 6 (Part A and B, respectively). The Working Paper includes a synthetic review of the international tea and coffee markets since the early 70s, the impact on Rwanda, the consequences of the termination of the International Coffee Agreement, and the expectation about future prices for coffee and tea products of different quality. Working Paper 7 contains a brief account of the internationally recognized Fair Trade organizations network.

Coffee. The market of low quality coffee is currently characterized by excess supply with prices at the lowest level in history. The growth of consumption is stable at no more than 60 000 t per annum, despite efforts to break through in the Chinese market. On the other hand, production of low quality arabica and robusta coffees has expanded fast and is expected to continue to grow at a rate higher than demand. Vietnam, a very small producer 15 years ago, is now the second largest coffee producer after Brazil. Over the same period, coffee yields in Brazil have increased tremendously, with total output increased by 30% despite a reduction of surface planted by one third. Brazil produces mostly low quality arabica, and Vietnam mostly robusta coffee. Barring exceptional circumstances, such as the calamity that befell Brazil in 1986, prices are bound to remain very low, possibly even lower than today. Larger quantities produced will only further depress prices.

Furthermore, during the last 20 years, the degree of monopoly enjoyed by the multinational coffee trading companies, the price-inelasticity of consumers’ demand, and the sophistication of the marketing technologies in consuming countries, have resulted in increasing the margins between export prices and the prices paid by consumers in the importing countries at retail level. Trading companies and roasters have accumulated large profits, despite the large increases of the cost of marketing at retail level. The share of the total world consumer spending on coffee at retail level that reaches producing countries has actually declined from USD 10 billion, out of a total retail value of USD 30 billion in the 1980s, when the international coffee agreement (ICO) was in force, to USD 8 billion out of a total retail value of about USD 55 billion now (see graph). This is viewed as one example of the negative impact of globalization on the economies of primary producing countries. The situation is even worse with respect to the resource transfer from final users to coffee planters, because of the rigidity of the cost structure of the local processing and marketing organizations. Under the circumstances, only very low cost producers, such as Vietnam and Brazil, are able to guarantee a low but remunerative price to their growers. Despite cheap labor, Rwanda is not a very low cost producer.

On the other hand, the situation is better with regard to good quality arabica coffees, the demand for which is sustained by a market that increasingly discriminates in favour of quality. Such demand is confronted by a relatively inelastic supply of adequate products. Prospects are, therefore, that the price differential between ordinary arabica and robusta coffees, and top quality arabica, which is already significant, will continue to increase over the next few years.

Tea. World demand for tea has expanded steadily at 2% per annum, sustained by the expansion of consumption in the main producing countries, such as India and Sri Lanka, until the end of the 1990s, when the increase in demand ceased. Subsequently, a world surplus occurred, causing a drop in price of about 25%. Since overall supply is expected to continue growing at a faster rate than total consumption, low prices are also expected to continue for some time. However, as in the case of coffee, the price decrease has affected essentially producers of low quality teas. Demand for good quality teas, such as Darjiling and Assam teas in India and some Sri Lanka and Kenya teas, has continued to expand, and their prices have commanded a good premium over the price of average or inferior quality teas. 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 for the financial viability of new investments in the sub-sector, must be restored after the decline in the quality of OCIR-Thé products occurred after the 1994 war. Currently, not all tea factories in Rwanda are back to the pre-1994 performance in this respect.

The view of experts and traders consulted by the mission coincides with the view of the GoR in that, provided the country production is brought back to the pre-war level of quality, Rwanda tea can obtain prices. Some traders feel that most Rwanda CTC teas can fetch higher prices than the best Kenya teas. The Nshili area, in particular, has the potential to be among those, provided growers apply the correct pruning and harvesting practices, fresh green leaves are delivered quickly to the factory, and adequate processing immediately follows.

Traditional export crops and smallholder cash income. A combination of factors has changed the traditional role of cash and export crops in the livelihood of the rural people of Rwanda. On the negative side, these include: the war damages, which have been very serious at farm and processing industries level; the dramatic drop of international market prices, particularly of coffee prices; the currency adjustments and consequent large increase of input cost; rigidity in the cost structure and degree of monopoly of trading and processing enterprises, scarcity of labor in families affected by the genocide and by the spreading of HIV/AIDS, land disputes with the returnees, uncertainty and slow progress in implementing the privatization process, particularly in the tea sub-sector. These factors have set in motion a trend for diversification which begins to be noticeable. This trend is supported by two important new factors: (i), the growth of urban demand for food crops and horticultural products, and (ii) private sector initiatives to develop new cash crops markets.

Until the end of the 1980s, due to high prices and to the absence of other opportunities, coffee was often the major source of cash for the smallholders, and poor families shared in this even when they had very few bushes to harvest. By the end of the 1990s, with the radically changed situation, the response of many farmers have been to neglect their coffee plots. With prices below 200 Frw per kg of coffee parche, the income is hardly worth the effort of harvesting and de-pulping, let alone that of rehabilitating, replanting when necessary, and properly tending the coffee bushes. Unlike in the 1980s. However, other crops can be marketed for cash now, including food crops, and poor farmers who are unable to achieve food security from their own produce tend to get rid of their coffee and plant food crops instead. Since the coffee plot occupies a minor part of the family land holding, the conversion can be done without significant loss of income.

The situation is different for smallholder tea growers. A poor family with a plot of 0.2-0.25 ha of tea has a relatively reasonable and regular cash income all the year around even at the current low price paid by OCIR-Thé. Women often retain this income, since they do the picking and delivery of the green leaves, and this generally helps to improve the livelihood of the family. In tea, the smallholder problem is how to get better prices for the excellent quality of green leaves they produce. It can be shown, in the case of Nshili for example, that a new factory, having amortized the long-term debt incurred for its construction, can pay smallholder growers a price twice as high as that which is currently paid by OCIR-Thé (see chapter on Benefits and Justification).