A worker spreads coffee bean to dry at a coffee processing factory in the Central Highlands of Vietnam
The Ministry of Industry and Trade has issued a circular prohibiting foreign firms from directly buying produce from farmers. There is concern that the regulation, to take effect June 7, will reduce competition and force farmers to sell to local firms at lower prices.
Vietweek asked Nguyen Xuan Thai, an executive of the Vietnam Coffee and Cocoa Association, which also represents farmers, about it.
Vietweek: There is a fear that the new regulation will seriously affect farmers' coffee sales since they will have fewer customers. What do you think?
Nguyen Xuan Thai: Only foreign firms not investing in coffee production will be prohibited from buying coffee directly from farmers, but they can buy from Vietnamese dealers. So the regulation will not have a strong impact on coffee sales.
In fact, coffee demand is always higher than supply, so we do not have to worry that our exports will be hit. The issue is whether Vietnamese firms have enough money to buy coffee from farmers and wait for higher export prices. However, only a few wealthy farmers can keep their coffee harvest and wait for higher prices.
The regulation will enable local firms to have a more stable supply.
But will the regulation force foreign firms to leave the Vietnamese market?
They would never leave the market. Their profits from the market are very large since the US dollar is appreciating against the dong. Foreign firms can get loans at around 2.5 percent interest from banks in their home countries, much lower than the 3.5-4 percent paid by Vietnamese firms. Thus, their profits are always higher than that of Vietnamese firms.
Foreign firms can also directly sell coffee beans purchased in Vietnam to international processing firms, so their profits are higher. Local firms often purchase coffee from farmers and then sell it to international intermediaries, who resell the product to global processing firms. Thus, Vietnamese firms' profits are often lower than those of foreign invested ones.
But farmers face losses since foreign firms always pay them higher prices than local ones for coffee?
Selling to foreign firms can bring immediate benefit as foreign firms pay our farmers higher prices for coffee than local ones. Now, Vietnamese firms cannot pay higher prices to farmers because their other costs such as bank interest are higher than that of foreign firms.
But foreign firms, if allowed to buy coffee from farmers at high prices for a while, will push Vietnamese firms out of the market. Then they will be able to force farmers to sell their produce at lower prices. Thus, farmers will not enjoy any profits in the long term.
What's the reason for the bankruptcy of many local coffee firms in the past few years?
Low competitiveness is also one reason for many local coffee firms' bankruptcy. Due to the large number of coffee firms closing down, banks have recently become reluctant to lend, so some firms find it hard to raise funds for production. Besides, interest rates are too high for them to make profits. Also, Vietnamese firms have to export their coffee via financial intermediates, so their profits are smaller.
Will the new regulation help the coffee industry develop?
The participation of foreign firms in the market could force Vietnamese companies to improve their competitiveness. Some firms, which could not compete, have gone bankrupt. In the current context of serious difficulties for local firms and the robust participation by foreign firms in buying produce from farmers, more local firms will go bankrupt if the Ministry of Industry and Trade does not prohibit foreign firms from buying raw coffee for export.
How do other coffee exporting countries deal with the issue?
In Brazil, for instance, coffee is produced by co-operatives. Farmers work in the co-operatives. They have concrete business plans, so they can often sell their products at good prices. But in Vietnam, farmers cultivate coffee on small land lots of less than 1,000 square meters to a few hectares. They farm by themselves and find customers for their produce by themselves.
In Brazil, foreign firms cannot buy coffee directly from farmers, only from the co-operatives. Foreign firms cannot directly invest in farming either, only via co-operatives, which then use the money to reinvest in farming. Foreign investors investing in the co-operatives have priority in buying raw coffee from the co-operatives.
In Vietnam, foreign firms investing in farming can directly buy raw coffee from the farmers.
We should reorganize our coffee production. Farmers should work in co-operatives to produce coffee of higher quality. For this, authorities should help them. For example, provincial people's committees should make plans and provide directions for this.
It is not difficult to find customers for our coffee. However, we can make high profits only when our products have high quality.
The general secretary of the Vietnam Coffee and Cocoa Association, Nguyen Viet Vinh, says only a few foreign firms buy raw coffee from farmers for processing in Vietnam. Many others buy and export for earning profits. The Ministry of Industry and Trade said foreign-invested firms have made up 60-65 percent of Vietnam's annual export of coffee bean in the past couple of years.
Many local companies in fact complain of unfair competition, saying they invest a lot of money to provide farmers with materials and equipment only to see them sell their crops to foreign firms because they offer higher prices.
The new regulation is expected to tackle that problem, Vinh says. It would also encourage greater focus on coffee processing since both foreign and local firms now mainly focus on exporting raw coffee, he adds.
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