Dave Presentation In En

© 2009

Author: Dr. Dave A. D’haeze

Date: 4 December, 2009

Event: 4C Workshop on Sustainable Development

Location: Dalat

Identification of a suitable organizational model for coffee producers in Vietnam

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Who is E.D.E. Consulting?

Established in 1991 as consulting company of Neumann Kaffee Gruppe.

Today, a subsidiary and the executing structure of the Hanns R. Neumann Foundation.

Vision

E.D.E. Consulting contributes with its services to the improvement of living conditions of smallholder coffee and cocoa farmers through a business oriented sustainable development approach.

Representation in Vietnam

Since 2004, representative office in Hanoi.

Currently managing 5 long-term coffee projects, besides short-term consultancies.

IntroductionIntroduction

JustificationJustification

ObjectivesObjectives

Recommen-Recommen-dationsdations

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Core elements of our approach?

Sustainability: economic viability of the business, social responsibility and environmental protection.

Limitation of risk: training on risk management and accountability at the level of farmer organization.

Financing and extension: support to formal sources of financing and improved access to training.

Monitoring and evaluation: comprehensive impact assessment are crucial for further developing the approaches of promoting sustainable solutions at the level of farmer communities.

Farmer entrepreneurship: e.g. training on financial literacy.

Farmer organizations: facilitate development of economies of scale and generate added value.





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Provide a justification for the development of farmer organizations

Describe one organizational form as advised by Rabobank Foundation & Rabobank International Advisory Services

Formulate recommendations for:IndustryPolicy makers4C association and certification programs





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Smallholder production

90% of farmers smallholder (on average 1 ha with 2 Mt production).

Difficult for farmers to acquire new processing machines to sustain good coffee quality at farm level (e.g. mechanical dryers).

Due to the fact that farmers buy their inputs (e.g. fertilizers, etc.) and sell their coffee individually in small quantities, transportation costs are relatively high.

Current collection system takes away the incentive for farmers to produce high quality coffee; no price incentives for better quality.

Vietnam faces challenges to hold its position in the global market

Growing competition.

Demand for quality, traceability and food safety increases.





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Unfavourable business climate

Poor infrastructures in the rural areas.

Small tractors with local-made carriers are not allowed to be used any longer on highways, investments in trucks not feasible for small farmers (small quantities no finance).

Authorities have taken ample initiatives to protect coffee in the fields. Farmers still face strip picking which lowers the average coffee quality.

The reputation of cooperatives left negative impressions since these cooperatives were top-down organized and not based on clear business principles without much benefits for farmers.





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Smallholders’ lack of capital or collateral

Indebted farmers are forced to sell their produce immediately after harvest to the collectors to generate cash for next season’s inputs and family expenditures Informal loans.

Village collectors offer simple lending services

High interest rate (2 – 3 times higher than formal interest rates).

Loans paid back through sales of physical coffee to the collectors.

While farmers receive more than 90% of the FOB price at the farm gate the real price they receive is much lower because of outstanding loans (interest rates).





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Banks services for coffee farmers in Vietnam

Limited amounts (based on the area and risks).

Collateral needed (e.g. land title).

Short to medium basis only.

Challenges for banks

Need of outlets in the vicinity of the farming operation (often through the farmer or women unions).

High transaction costs.





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Vietnamese cooperative law has scope for improvement in line with the international law e.g.

According to the Law, the definition of cooperative’s legislation is similar to the definition of enterprise’s legislation with only one difference: the voting right (in coops one person - one vote)

Article 5 mentions the surplus distribution to members, firstly for capital contribution, secondly for labor contribution, and the remaining if any for the use of cooperative services. Result: Conflicts are unavoidable between the passive and active shareholders in the same organization. Article 27 allows the governance mix with the management of a cooperative

Executive authorities at different levels, sectors, officers do not thoroughly grasp policies and opinions of the State Legislation on the development of cooperative, on the essence of new cooperative model

The Vietnamese government has already signaled interest to amend the Law.





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Association

In Vietnam the association works based on a decree no 88/2003/NDCP, there are no laws on associations.

Allowed to undertake business oriented activities, but their business activities must be non-profitable (i.e. profits (if any) will not be distributed to the members, but serve community).

Collaborative group

Not a legal entity; works based on the Civil Law.

Collaborative agreement, with certification (recognition) from the Commune Peoples Committee.

Serve their members in meeting business or/and social, cultural demands.

Members do not need to contribute capital or land.





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Limited liability company / stock enterprise

Works under the Enterprise Law.

Private enterprise based on share capital contribution.

The ownership of each shareholder depends on the proportion of his shares.

Main target is the return of investment.

The profit is for the investors.

Existing Vietnamese cooperative

Works under the Vietnamese Cooperative Law.

Private company owned and governed by their members.

An economic, social or a social-political nature.

Self support for their members.





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The association and collaborative group do not solve the problem of getting access to finance.

For associations and collaborative groups access to markets still limited.

Current cooperative structure does not maximize profit for their members.

High entry barrier for new members to enter the existing cooperative (only richer families with sufficent capital join).

The stock enterprise is targeted to return of investment to the investors.





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Members

Voluntary Remunerated

General ManagerHire

Hire

Employees

Board of Directors

Election

Serve

Supervisory Board





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Economic Cooperative in accordance with International Law

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Service at cost

The cooperative does not create an independent profit but it performs at minimum cost (price) to its members. The cooperative is “a margin organizer” for its members.

However, the cooperative should make a surplus for reservation and expansion.

Non-members and clients / customers are subject to profit maximization.

Proportionality Principle

The cooperative will allocate the returns and costs proportional with the members’ turnover.

Proportionality of members’ rights and duties, including liabilities and voting rights (plural voting).

Reservation according to members’ turnover.





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Principle of Self-Financing

The cooperative cannot, for its main business objective, attract risk bearing capital from external investors, because this would conflict fundamentally with the members’ interests.

Members have to provide themselves the risk bearing capital.

For secondary operations, external participation is possible (joint ventures etc.).

The self - financing principle is realised through liabilities, annual reservations, members’ accounts, etc.





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At member level

The members can deliver during harvest and don’t need to wait for the better prices.

On the basis of self-financing, the members can repay their loans gradually by their own capacity.

At cooperative level

The coop will pay in cash to its members upon coffee delivery.

Provide input services for the members. (e.g fertilizer, extension, etc.).

The coop marketing department will follow the market fluctuation to decide the appropriate time for selling coffee.

Main part of surpluses at the end of fiscal year will be returned to the members.





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Industry

The industry is very active on an individualistic and competitive basis to promote sustainability (e.g. 4C, Utz,…), but faces challenges at the level of farmer organization. Critical number of farmers in the certified/verified supply chains have been or will to be reached soon.

Transfer verification/certification units to the farm level.

Joint action and sharing of experiences between public and private sector towards awareness raising and training of farmers may be more cost-efficient.

Policy makers

Support Cooperative Development through awareness raising campaigns for beneficiaries.

Promote training on Economic Cooperative Development under international Law for executive officers at different levels.





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4C association and certification programs:

Contribute actively to the development, testing and dissemination of new tools that can contribute to a sustainable coffee sector (pragmatic and generic program approach), beyond volume targets and logo.

Through its worldwide network 4C could facilitate to attract other stakeholders to actively & practically contribute to ongoing & upcoming initiatives (e.g. donors, advise on or in-kind contribution for experts) that could support the Vietnamese coffee sector in reaching its objectives.





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Thanks for Your Attention

Feel free to visit our Projects

Representative Office Asia Pacific4/34 Giang Van Minh Str., Ba Dinh Dist. Hanoi, Vietnam

Phone/Fax: +84 (0)4 734 1224email: [email protected]

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