May 12, 2010

A Better Brew for Success

Economic Liberalization in Rwanda’s Coffee Sector
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Introduction

In 2008, Solberg and Hansen, SA, a Norwegian importer of high-quality specialty coffee, bid just under $40 per kilo for a lot of Rwandan coffee.1 This bid, the equivalent of over 21,000 Rwandan francs, while exceptional, represents a real and positive transformation within Rwanda’s coffee sector. In the not-too-distant past the country was known as a producer of mediocre grade coffee that attracted little attention from discriminating importers or consumers.2 Today, Rwandan coffee is increasingly recognized as a high-quality product, one for which importers such as Solberg and Hansen and in turn, consumers, are willing to pay a premium Although the Rwandan economy is diversifying, agriculture continues to be the primary source of livelihood for 90% of the population. The overwhelming majority of these are subsistence farmers. Just over 10% of these farmers planted coffee in 2008 and the crop remains a major source of export revenue, generating over 36% of total export revenue in 2009 with projections for this figure to be higher in 2010.

This paper analyzes the recent transformation of Rwanda’s coffee sector. It begins with a brief discussion of the history of coffee production in Rwanda, then focuses on government efforts since the genocide to break a “low quality/low quantity trap” in the sector. The government’s new policies were designed to shift incentives so that both the quality and the quantity of coffee produced in Rwanda would increase. To some extent these efforts have been successful however the sector faces a number of serious challenges, which are addressed. The paper examines the direct economic benefits of these policy changes. For smallholder farmers and other participants in the coffee value chain, producing higher quality specialty coffee means increased income and expanded connections to world markets. In addition to direct economic benefits, this paper considers the indirect benefits of liberalization in the coffee sector. Increased economic benefits and commercial cooperation at coffee washing stations and at cooperatives may be increasing trust levels among coffee farmers. Finally, the paper concludes by considering the lessons of Rwanda’s policy initiatives in the coffee sector and offers suggestions to address continued concerns.

The evolution of coffee production in Rwanda

The transformation of Rwanda’s coffee sector has happened relatively quickly. In 2000, Rwandan farmers were producing semi-processed coffee for sale on world markets. Farm gate prices paid to farmers were low (60 Rwandan francs per kilo) and the prospects for farmers and exporters to increase income or profits were limited. Since the late 1990s the government has liberalized the sector, removing a variety of barriers to trade, creating new incentives for groups and individuals to invest in coffee production and facilitating entrepreneurship in the coffee industry.

In a focused, decade-long effort the government, working with the private sector and with donors, has reshaped this important industry: the regulatory framework for coffee production has been modified, over 100 coffee washing stations have been built, donors have supported the development of market linkages between producers and foreign buyers, cooperatives have formed, and smallholder farmers are working together in an effort to increase quality and improve marketing and branding.

These changes have important effects on the ground in Rwanda. Coffee continues to generate important export revenue for the country. While figures vary year-to-year, in 2008 coffee exports generated just over $47 million in revenue, compared with $35 million in 2007. Higher incomes benefit farmers, their families, and their communities in a variety of ways: farmers can improve a home, pay medical expenses or school fees, or better ensure food security. When cooperatives earn a profit this allows them to hire workers, purchase capital, and support community projects such as improved schools.

In addition, coffee farmers may be experiencing social as well as economic benefits from the transformation of the coffee sector. Working together at coffee washing stations, farmers have new opportunities to interact with other Rwandans. These repeated interactions may be helping to lessen the sense of ethnic distance among members of Rwandan society. As farmers and other workers at coffee washing stations experience increased economic satisfaction which comes from the higher incomes they earn from coffee, they may also feel greater levels of trust and conditional forgiveness towards others with whom they interact as well as more positive attitudes towards reconciliation. Because coffee in Rwanda is grown by poor smallholders who make up the vast majority of the population (90%), these positive changes have the potential to benefit a broad swathe of Rwandan society.

Challenges and concerns

Despite this good progress, the sector faces a number of serious challenges. As a landlocked country Rwanda’s coffee producers face high transport costs. Moving coffee cherries quickly over Rwandan roads is one concern; moving processed beans out of the country in a timely and cost effective way is a second concern. Other concerns are related to the costs in the industry. Production costs remain high – many newly built coffee washing stations are operating at much less than full capacity. Labor costs are higher than in neighboring countries. Rwandans farmers are also less productive than neighboring coffee farmers. Although some have received good support and training from NGOs, support in the form of regular visits from extension agents is limited.

A variety of management concerns have plagued the cooperatives that many coffee farmers join. One close observer of Rwanda’s cooperatives has said: “After 5 years of extensive cooperative capacity building, Rwanda’s coffee cooperatives remain surprisingly fragile, unorganized, and dysfunctional.”3 Some cooperatives have mishandled loans. Others have not fulfilled contracts in a timely manner. Some have trouble marketing their products. Some of these problems are the result of a lack of training or financial management skills.

Other challenges involve the broader institutional environment. As Rwanda implements a new land law some smallholder farmers may face uncertainty or insecurity. Women especially may be especially vulnerable. The government, NGOs, and the other stakeholders are attempting to deal with these various challenges. If capacity issues can be addressed, marketing and sales problems resolved, incentives strengthened to produce higher quality beans, and harmful government interference avoided, then the positive gains of the past several years should continue and Rwanda’s smallholder farmers can look forward to earning more from coffee production. These incomes should, in turn, filter through local economies to spread benefits to other Rwandans.

1. “Coffee `Cup of Excellence’ Slated for next year, The New Times (Kigali), September 23, 2009. Specialty coffee will normally sell for somewhere between $3 and $4 per kilo.

2. Traditionally Rwandan farmers removed the fruit of their cherries either with a hand-pulper or, perhaps, using rocks. Beans would then be dried and fermented in buckets, for varying lengths of time, in water of varied quality. As a result, coffee was of lower, industrial quality. This home-processed coffee still makes up the majority of coffee being sold from Rwanda.

3. The SPREAD 2007 Annual Report, available at: http://www.spread.org.rw/spread_project.php