The State of Domestic Coffee Production in China
In a nation of avid tea drinkers, coffee continues to gain ground.
By Nathan Barlow
Oct. 22 – Coffee first made its initial appearance in China when a French missionary in the 1890s planted beans throughout Yunnan Province. Over the next hundred years, coffee would go largely unnoticed but, as is the case with many things in China, the market has changed quite a bit over the last 20 years.
This is the final section of our three-part series detailing various facets of China’s coffee industry, and this article focuses on domestic coffee production in China. Part one, introducing the China’s coffee industry, can be found here, while part two, detailing importing and exporting coffee beans in China, can be found here.
The vast majority of China’s coffee is grown in the southern province of Yunnan, and is only of the Arabica plant type – mainly of the Catimor variety (a hybrid cross between C. Arabica and C. Canephora).
Within Yunnan, the region of Pu’er produces roughly half of the province’s total coffee output with the region having produced 39,000 tons of coffee out of the total 82,000 tons produced during the 2012-2013 harvest. Further, over the next 5-10 years, the Pu’er Principal Government plans to expand its coffee plantation area to over 1 million mu (which roughly translates to 66,667 hectares) to capture a market value of about RMB10 billion (US$1.61 billion). Also, the Pu’er region averages over 1 ton of green coffee per hectare, which would make the region’s green coffee output raise by over 50 percent.
Traditionally, the Pu’er region has only produced tea – and even today it remains one of the most famous sources of the black tea variety. However, many farmers have made the recent change to coffee production due to the higher selling price. Price-wise, coffee beans were sold at an average of RMB16 per kilo in 2009 before jumping up to a high of RMB40 per kilo in 2011. The price has since dropped in 2012 to around RMB30 per kilo.
Nestle and Starbucks Face Off in Yunnan
Nestle first established its presence in Yunnan Province in 1988 when it began to develop its coffee presence in China. By 1997, the company had established an agricultural assistance service program and also an experimental/demonstration coffee farm. In 2011, Nestle committed (through its Nescafe Plan) to double the amount of coffee it buys in the region by 2015.
Nestle bought 20 percent of Yunnan’s total coffee bean crop last year, and the company has provided training to over 8,500 coffee farmers in the region since it first entered the market.
This year, Nestle signed a memorandum of understanding with the Pu’er local government to invest a total of RMB100 million for the creation of a Nescafe Coffee Center. The center would provide the region with a coffee farming institute on top of an interactive consumer experience center. This institute will be the largest of its kind in China, and will provide annual training for 5,000 farmers, agronomists and coffee business professionals.
Roland Decorvet, chairman of Nestle China, recently noted: “[China’s per capita annual coffee consumption] should grow from four to seven [cups per capita] in the coming three to four years… [and] within 10 to 20 years, dozens of cities in China will be like Hong Kong today (150 cups per capita).”
Meanwhile, Starbucks has made similar efforts to increase its presence in China’s primary coffee producing region of Yunnan. Having only first made formal ties with the southern province in 2009 through a collaboration that introduced four coffee bean varieties to the area, Starbucks had a comparatively late start.
However, Starbucks professionals have overseen quality control efforts, tastings and observations at plantation gardens at local Yunnan-based coffee farms. Specifically, Yunnan coffee farm Aini, through help from Starbucks’ coffee professionals, achieved a cup score of 81.5/100 on a blend of its own coffee – which qualifies it as a “specialty coffee” of world-class standard. Starbucks now offers these high quality Yunnan coffee beans at its stores worldwide.
The partnership became formal just this past year as Starbucks and the Aini coffee farm entered into a joint venture which has already led to the creation of a processing mill capable of processing up to 20,000 tons of green beans annually.
More importantly, Starbucks also significantly increased its presence in Yunnan in December 2012 through the establishment of its own Farmer Support Center in Pu’er.
John Culver, Starbucks’ president for China and Asia-Pacific, noted: “We believe that Yunnan will play an important strategic role in our long-term supply of premium Arabica coffee.”
A Case Study: Yunnan Pu’er ManLao River Agricultural Co. Ltd.
David Dai from ManLao River recently provided extensive information and an in depth look at one of its coffee plantations in Pu’er, Yunnan. The company provides educational, sales and facilities support to the 3,000 employed farmers by way of growing, drying and processing locally grown coffee beans that are to be marketed and distributed the coffee throughout the world.
ManLao River produces roughly 500 tons of coffee annually, a number that is not intended to grow significantly over the next five years as it looks to increase quality over quantity.
“We’ve been marketing Chinese coffee since 2006, and people used to literally turn and run when we mentioned the words ‘Chinese coffee,’” Dai recently commented. “Only recently have we been able to break through the stereotypes and gotten the feedback that our coffee is getting even better than previous years.”
“In the beginning 2006 our cup score from SCAA (Specialty Coffee Association of America) was 79. Now we’re getting customer feedback of cup scores up to 86,” he added.
Despite the optimism about coffee production in the Yunnan region from multinational companies, the local government and farmers, there are still serious shortcomings. Given the relatively recent shift in production focus away from tea and other crops to coffee, there is the general issue of inexperience throughout the entire coffee production process.
The Development Plan for the Coffee Industry of Yunnan Province (2010 – 2020) outlines some of the challenges faced by the Yunnan coffee industry, including:
- Lack of local government support and a unified management system;
- Poor infrastructure which limits the overall production capacity;
- Small, scattered and inferior processing machinery (often used and outdated) which weakens the competitiveness of the final product;
- Lack of acknowledging market risks and effective precautionary measures; and
- Producing coffee is a water intensive process but the region faces water challenges and deprivation
Wu Jiahang of the Colombian Coffee Growers Federation also noted the following challenges with regard to Chinese coffee:
- Massive range in the quality of coffee beans produced, sometimes beans are cracked or have inconsistent size/color;
- Lack of professional technology and an information exchange platform, leading to poor techniques;
- No unified and long-term objective in the development and promotion of the region’s coffee market; and
- No unified system to monitor the industry data and ensure quality control.
Currently, the majority of Yunnan coffee is too expensive for consumption within China, but also not at a high enough quality to be considered “specialty coffee.” As a result, an estimated 70 percent of Yunnan’s coffee is exported, which forces the region to compete with global prices and quality, albeit with an often overpriced, low-quality product.
However, as the region continues to gain vital experience and know-how in the years ahead, Yunnan coffee should be able to reach its potential to provide the world with high quality and competitively priced coffee.
Dezan Shira & Associates is a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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