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The La'o Hamutuk Bulletin
Vol. 3, No. 2-3: April 2002

English PDF Format   |    Tetun/Bahasa Indonesian PDF Format

Issue focus: U.S. Government Assistance, Coffee

Table of contents:

Part 1

Part 2

Part 3

 

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Focus on Coffee and East Timor

Coffee has been a major part of East Timor’s economy for well over a century. With international prices at an all time low, East Timor’s coffee industry faces both global and local challenges. The following articles examine some of these issues, providing a context to take a closer look at the largest and longest-running U.S. government assistance program in East Timor, the NCBA’s Cooperativa Café Timor (CCT) project.  

Coffee in the World Economy

For most of the post-World War II era, coffee has been the second most valuable commodity traded internationally after oil. Over the last few years, however, other commodities – such as aluminum and wheat – have emerged as more important in the international economy. In part, this is because of the very low prices currently paid for coffee beans on international markets. Nevertheless, coffee remains extremely important internationally and is a key export for numerous "developing" countries. 

More than 90% of coffee production takes place in relatively low-income, developing countries such as East Timor. The biggest producer by far is Brazil, which, together with the next two most important coffee-growing countries (Vietnam and Colombia), is responsible for almost half of all coffee production. East Timor is a very small player in the overall global coffee trade, producing much less than one percent of the international total, but coffee is extremely significant in this country’s economy. It is the most important source of foreign exchange for East Timor (although revenues from oil and natural gas will soon overtake coffee), and it serves as the primary source of income for about one-fourth of the country’s population—about 44,000 families. In some countries—such as Burundi, Ethiopia, and Uganda—coffee exports provide more than 50 percent of national income. Worldwide, an estimated 20 million households produce the crop. 

According to a report by Oxfam Great Britain, international coffee prices have dropped by half in the last three years, to the lowest level in 30 years. Adjusted for inflation, current coffee prices are the lowest ever. 

World coffee sales in 1997 were more than $43 billion, but the countries that produce the coffee received less than one-third of the total revenue, and individual coffee farmers received much less. Most of the money went to large, transnational companies that control the international coffee trade and coffee processing and by major coffee retailers such as Starbucks, which buys the majority of East Timor’s certified organic coffee. 

History, geography, and political power help explain why coffee prices are so low. Coffee production in most parts of the world has its roots in colonialism. Colonial powers saw coffee as a good method for earning profit, while satisfying rapidly growing demand for stimulants in places like Western Europe and the United States. From the beginning, the majority of benefits from coffee production and sales has gone to the people and companies who dominate the trading and processing of coffee, not to those who actually grow the crop. 

It was for such reasons that major coffee-producing countries began to band together in the aftermath of World War II to organize for better prices and a more just distribution of profits. This culminated in the signing of the International Coffee Agreement (ICA) in 1962. Significantly, the signatories to the ICA included not only most of the coffee-producing countries but also most of the consuming countries. 

Through the International Coffee Organization (ICO), the ICA established a regulatory system that set a target price for coffee and assigned export quotas to each producing country. When the price on the international market was greater than the target price, the ICO would relax quotas, allowing countries to export more. And when the market price fell below the target price, the ICO would lower the export quotas. Although there were problems with this system, most analysts agree that it led to stable coffee prices and higher incomes for coffee farmers. 

For a variety of reasons, the ICA system fell apart in 1989. These included differences among producing countries over quotas, the growing volume of coffee traded outside the ICA system, and changes within the international coffee market. Also significant were changes in U.S. policy towards Latin America in the 1980s. In Central America, the United States wanted to increase coffee imports from countries whose governments it regarded as friendly to U.S. corporate and military domination—such as El Salvador—and decrease imports from countries regarded as unfriendly to Washington’s regional agenda, especially Nicaragua. Coffee export quotas undermined U.S. government interests in this regard. 

The breakdown of the ICA system has hurt coffee farmers and producer countries. Prices have become much more unstable and there has been a shift of coffee revenues from farmers and producing countries to traders and retailers. Most consumption of coffee takes place in relatively wealthy, highly industrialized countries such as Germany and the United States. Similarly, the companies that most heavily influence the international trade in coffee are based in these countries. 

During the 1970s, coffee growers received an average of 20 percent of total international income from the trade and sale of coffee—a percentage that remained roughly constant through 1989 while the ICA was still in place. During this time, coffee traders and retailers in consuming countries received approximately 55% of total income. Since the breakdown of the ICA system, there has been a dramatic shift in distribution of revenues. By 1994-95, coffee growers were receiving only 13% of total revenues, while consuming countries were receiving 78%. Thus, coffee traders and retailers have become increasingly wealthy as coffee farmers have become increasingly impoverished. 

This is the context that East Timorese coffee farmers must deal with.

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When the coffee cherry is picked from the tree, initial processing removes the pulp, and the coffee is in parchment form. The layers of parchment and silverskin are removed in further processing, leaving just the green bean. The green bean is then exported for roasting, grinding, brewing and drinking.

 

Coffee in East Timor Today

After the 1999 referendum the Indonesian army (TNI) and its militias devastated East Timor’s coffee industry by killing and displacing farmers and their families, stealing and destroying most of the coffee crop, and destroying roads, warehouses, and other infrastructure vital to the industry. However, coffee remains the only, although still very small, source of cash income for many farmers’ families, and the industry has been rebuilding quickly. 

Different factors affect the quality and price of East Timorese coffee, and the crop can be loosely divided into ‘high-end’ and ‘low-end’ categories. High-end coffee, about 30% of East Timor’s crop, is bought at slightly higher prices and marketed as specialty coffee in developed nations. High-end coffee in East Timor is of the arabica variety (80% of East Timor’s coffee is arabica, and 20% is robusta), and is given increased value primarily by having official organic certification and going through a wet-milling process. With the exception of some of the coffee purchased by Delta, CCT buys almost all the high-end coffee in East Timor. Although most of East Timor’s coffee could be considered organic, internationally recognized certification requires considerable paperwork and control inspections, making organic certification difficult for smaller groups. 

Wet-milling, or "washing," is a time-sensitive operation, in which the coffee beans are separated from the fruit, or pulp, within 24 hours after being picked from the trees, and soaked in water to remove the mucus surrounding the bean before sun-drying the beans. This process significantly increases the quality and the value of the coffee. Wet-milling is also difficult for smaller groups, and with the minor exceptions of a few small, mainly NGO-run projects, CCT is the only producer of wet-milled coffee. 

Farmers use more traditional dry-processing methods for most of the rest of East Timor’s coffee, sun-drying the cherries directly after they are harvested. The farmers remove the pulp themselves and sell the beans in a form called parchment for further processing in another country. This coffee makes up the low-end sections of East Timor’s coffee industry, being of much lower quality and sold at a lower price. 

After the initial wet-milling or dry-processing, the coffee is known as parchment and undergoes further processing. Jancinco and CCT process some coffee in East Timor (USAID requires that all processing be done in the country), but the majority of the crop is sent to Indonesia for further processing (even the coffee that is processed in East Timor is later sent to Indonesia for distribution to the international market). From Indonesia, about 85-90% of East Timorese coffee is further exported, with the lowest quality part of the crop, 10-15%, being consumed by the Indonesian domestic market. One reason for the lack of processing facilities in East Timor is coffee companies’ reluctance to employ East Timorese for the production process, citing the current relatively higher wages in East Timor than in neighboring Indonesia. During the transitional period CCT has reduced the number of manual laborers used in their processing facilities, and other companies are expected to minimize the labor employed for any future processing. 

During the last harvest, CCT bought red cherries for wet-milling from the farmers at $.10/kg if collected at the roadside, $.12/kg if the farmers delivered the cherries to the processing facility. (About five kg of cherries makes one kg of parchment.) Other buyers usually bought dry-processed parchment from the farmers at $.40-$.60/kg, and Delta paid up to $.70/kg for good quality parchment. Many farmers who sell cherries to CCT are reluctant to sell their entire crop. Instead, they process some of the coffee themselves, since the dried parchment can be stored for selling later, with the hope of higher prices in the future. The World Bank recently estimated that an average coffee producing family in East Timor (about six people) has an annual cash income of about $200, 90% of which comes from coffee.

Who Buys East Timor’s Coffee Crop
(Estimated total 2001 crop: 6,500-7,000 tons)

 

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NCBA’s Coffee Project

USAID began supporting the National Cooperative Business Association of the USA (NCBA) in implementing a coffee project in the region in 1994, before most development agencies came to East Timor. Since then, NCBA’s coffee project has become the largest private-sector employer in East Timor, the main supplier of health care in rural areas, and one of the most controversial development projects in the country. This article presents an overview of the structure and main activities of the project, and explores some of the issues raised by the project. 

NCBA, formerly known as the Cooperative League of the USA (CLUSA), is a trade association of several thousand cooperative businesses in the United States. Cooperative businesses are owned by the employees who work at them, the consumers who utilize them, or, in the case of most agricultural cooperatives, the producers of the goods sold by them. In addition to representing cooperatives’ interests in the US, NCBA works around the world, usually with funding from USAID, to develop business cooperatives in other countries. NCBA began operating in Indonesia in 1977, developing cooperatives in furniture production, vanilla, shrimp farming, and other businesses. In July 1994, USAID gave NCBA a US$6.8 million grant to the Timor Economic Rehabilitation and Development Project (TERADP). Although the first phase of the project, developing coffee cooperatives, was originally scheduled to end in mid-1999, USAID has extended it until the end of 2002, with the NCBA receiving about $21 million in grants from USAID for this project from 1994 until now. According to one NCBA publication, the goals of the current project are to: 

Reduce time required for transition to a viable economy Reduce need for continued external relief assistance The NCBA has organized small-scale coffee farmers into a national cooperative structure known as the Cooperativa Café Timor (CCT), with the plan to become a self-sustaining, independent East Timorese cooperative business producing high-end coffee for export. Some of the profits are to be used for collective services for the farmers, such as basic skills training and health care. The diagram below outlines the system’s structure and functions. 

Coffee Cooperative System

In theory, the coffee farmers are the owners of the CCOs, which in turn own the CCT, and should have control over the activities of the business. However, coffee farmers La’o Hamutuk interviewed had no sense of such ownership, not realizing that their relationship with the cooperative should extend beyond selling coffee cherries and receiving basic training and health care. Most observers agree that NCBA officials are the ultimate authorities, with the system working more from the top down than from the bottom up. 

USAID plans to end assistance to the NCBA for CCT’s coffee buying, producing, marketing and selling activities at the end of this year. CCT management expects that they will still need NCBA’s assistance, especially with the marketing and selling of coffee abroad, and will look for other funding sources to continue NCBA’s involvement in the project. But other aspects of the project, such as coffee plant nurseries and the rural health clinics (see below), will continue to receive USAID funding through NCBA. USAID and NCBA are also planning to expand their activities in East Timor with new agricultural cooperative projects, in areas such as rice, corn and livestock. These projects will probably commence next year, and are currently waiting for formal approval from Washington.

Café Timor Health Clinics

Responding to the lack of basic health care in rural areas, NCBA has set up rural health clinics, known as Clinic Café Timor. According to NCBA officials, one reason the CCT project established the clinics was the assumption that healthy farmers would be more productive workers. So in addition to providing a much needed service to farmers’ families, the clinics would increase the cooperatives’ profits. Theoretically, the clinics will be self-sustaining, funded by CCT’s profits from coffee sales. Those members and their families who sell at least 1000kg of coffee per year to the cooperative will receive free services, while other patients will have to pay fees for each visit. However, since the clinics are currently the only health care available in most areas where they operate, they have been providing services free of charge to all patients regardless of their membership status. 

With 8 fully operational clinics and 24 mobile clinics, they are considered to be the largest provider of rural health care in the country, a significant accomplishment. The clinics are coming under increasing strain as they are receiving twice as many patients as before July 2001, which they attribute to most international health NGOs ending or decreasing their activities in East Timor. As USAID grants do not cover all aspects of operating the clinics, NCBA is currently also using their own funds to help maintain the clinics, and premiums from coffee that is sold under "Fair Trade" certification also help pay for the services. It is unclear how long this situation will continue, and the NCBA is working with the Ministry of Health to find a more permanent solution.

Insufficient Transparency

Detailed information about NCBA and their coffee project is very difficult to obtain. In our investigations, La’o Hamutuk often had difficulties setting up appointments with NCBA and CCT officials, and both groups have been unwilling to give clear and accurate information. Others have experienced similar difficulties, and even NCBA and CCT employees have told of their own frustration in trying to obtain precise information. The project’s lack of transparency has nurtured the growth of rumors concerning their activities, and little information has been made available to prove or disprove these rumors. 

Some of the most common rumors are about corruption in the CCT and NCBA. According to NCBA officials, NCBA regularly carries out internal auditing to prevent corruption within the CCT. As in any country, some small-scale corruption is to be expected when dealing with large amounts of money, and the NCBA is apparently taking steps to combat this. Based on their internal investigations, they have filed twelve separate cases involving corruption, mainly at the lower levels of the cooperative structure, filed in East Timor’s emerging legal system. However, these appear to be minor cases and there is no clear evidence of widespread corruption in the project. But the difficulty in obtaining precise information, and contradictory statements from NCBA and CCT officials makes it impossible for independent groups to disprove these rumors. Continued widespread beliefs of corruption will probably persist unless the project becomes more transparent. 

With coffee prices at their lowest point in history, it is not surprising that over the past two years farmers have consistently complained about the prices that the cooperatives have been paying for their coffee. Farmers we interviewed have some understanding that low prices on the international coffee market were affecting the prices they receive from the cooperatives, but they want CCT to provide better explanations of the low prices. They are suspicious of CCT in general, and convinced that corrupt CCO employees are to blame for the low prices. Furthermore, if the low prices continued they do not plan to sell their coffee to CCT in the next harvest. The project has recognized the need to educate farmers about this and other matters concerning the cooperatives. 

Given the current international market conditions, it would be extremely difficult for any coffee exporter to run a profitable business paying significantly higher prices than the CCOs. At the same time, however, companies on the other end of the distribution chain, such as Starbucks - a US-based coffee retailer giant and the largest buyer of CCT’s coffee - continue to increase profits year after year. Although efforts should continue to help the farmers increase their standard of living, USAID is essentially supporting a project in a coffee market that benefits companies in the developed world much more than the farmers who produce the coffee. Promoting expansion in the coffee sector is promoting further East Timorese dependency on an export commodity that will not provide dependable and sustainable development in the long-term. 

In the short time since the 1999 referendum, the NCBA project has worked quickly under difficult conditions. Although it has made mistakes, the project has set up a national structure that has helped the farmers export their crop, and has been generous in providing basic rural health care. Of course, there is still room for improvement. It is encouraging to see that USAID and NCBA are recognizing the need to diversify East Timor’s agricultural sector, with their plans to start projects in other products. Future projects must learn from the difficulties encountered during the CCT project. Future cooperatives must have full transparency and real ownership by the farmers, building sustainable and not just export-based businesses in order to truly improve the lives of East Timorese farmers and their families. 

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Coffee history

Coffee—the arabica variety—has its origins in northeast Africa. It is not completely clear when coffee production first began in what is now East Timor. It is thought that the Dutch first introduced the coffee plant to the western half of the island. While there are a few references in reports of travelers and colonial documents to the presence of coffee in Portuguese Timor in the early 1800s, it was not until the 1860s that coffee suddenly came to dominate the colonial economy. According to official records, coffee accounted for only about 7% of the value of total exports from 1858 to 1860. But by 1863-65, it accounted for an amazing 53%. 

The Portuguese colonial governor from 1859 to 1869, Afonso de Castro, ordered numerous areas of East Timor to be planted with the coffee plant, imposing a regime of forced cultivation. Working through the liurai (local kings), the Portuguese authorities coerced the indigenous population to grow coffee. 

The efforts were a success from the perspective of the Portuguese as coffee soon replaced sandalwood as the colony’s primary export commodity. During Portuguese colonial rule, coffee’s share of total export value was never less than 51.8% after 1862 with the exception of one year (in 1909 when sandalwood exports rose dramatically). In most years, coffee comprised more than three quarters of total exports. 

The rise of coffee production was part of an intensified Portuguese effort to "modernize" the East Timorese economy. The worldwide economic depression that began in 1929 combined with World War II interrupted this effort. But in the aftermath of the war, the Portuguese renewed efforts to cultivate coffee. 

At the same time, the Portuguese authorities tried to diversify the colony’s exports, with limited success. By the mid-1970’s, Portuguese Timor’s dependence on coffee was greater than ever. At that time, over half of all coffee production was in the hands of East Timorese (liurais and peasants), with the rest produced by small Portuguese farmers and a Portuguese company, the SAPT (Sociedade Agricola Patria e Trabalho). 

In the aftermath of the Indonesian invasion, the Indonesian military, through a company it owned - P.T. Denok - simply took over the SAPT and its coffee plantations, as well as the larger coffee trade. East Timorese farmers were forced to sell all their coffee through Denok. Because of its monopoly, Denok was able to set prices, ones that were always significantly lower than they would have been had there been other buyers. In effect, coffee farmers were forced to finance the very military that was oppressing them. However, in the mid-1990s, this monopoly began to disintegrate.

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Editorial: A Bitter Drink: Challenging the Injustice of Coffee

Coffee, enjoyed by so many drinkers throughout the world, is a crop of poverty for those that grow it, mostly small farmers in the developing world. In East Timor, coffee farming families earn only $200 per year. Coffee is also a commodity of wealth for coffee traders and retailers who are typically based outside the countries where the crop is produced. But despite the fundamentally unjust nature of the international coffee market—one that consigns small coffee producers, and their countries as a whole, to poverty—the World Bank, the United Nations, USAID, and elements of the East Timorese leadership encourage the expansion of coffee production. Nevertheless, there are several things farmers, local NGOs, and international donors can pursue in East Timor to help improve the fate of coffee producers. 

One area of great need is that of education. Coffee farmers generally have a very low level of understanding of how international and regional coffee markets work—largely a legacy of the isolation imposed by the Indonesian occupation, which prevented farmers from organizing themselves. They also have little awareness of how the coffee production process (from raw bean to ground coffee) functions and what choices they have of to whom and where they can sell their beans. Apart from education focusing on coffee-related matters, there is also a great need for general education and training programs in coffee producing regions—especially those aimed at youth—with the goal of diversifying economic activities so that there are other viable means to earn cash income. 

Farmers also need alternatives to existing buyers and processors of coffee. In this regard, coffee grower cooperatives need to be encouraged and constructed in a grassroots, participatory manner. These cooperatives need to ensure that farmers participate in as many stages of coffee production and trade as possible, including marketing. With government and/or donor assistance, the cooperatives could help establish communal facilities for processing coffee, thus ensuring higher quality and better prices. These cooperatives will have the added benefit of playing an important educational role among farmers and within their communities. 

At the same time, coffee growers need to be able to get their crop to processing facilities and potential buyers more easily. For this reason, the East Timorese government and donors need to improve transportation infrastructure in coffee-growing regions. As in all rural areas, roads are often of poor quality and most farmers do not have access to affordable transportation, thus limiting their marketing options. For such reasons, communally owned forms of transportation need to be encouraged and facilitated and roads must be improved. And because most East Timorese coffee is exported, the East Timorese government should avoid any export taxes on the commodity, while heavily taxing coffee imports. 

The government must also clarify the status of the land used by coffee plantations established and maintained by colonial occupiers—the Indonesian military’s PT Denok and, prior to that, SAPT, a company mostly owned by the Portuguese government. This land can and should be redistributed to individual farmers or to local cooperatives. Intensified agricultural extension can also help improve the production and incomes of coffee growers. Such extension can take various forms, including educational programs aimed at improved agricultural techniques (more systematic pruning, for example), help for local farmers to gain organic certification of their crop, and the distribution of young coffee trees for free. 

While these programs can provide higher prices and greater levels of security for East Timorese farmers, the increase in income will not be nearly enough to escape the coffee poverty trap. The challenges faced by local growers are not unique: low prices for coffee growers are a global problem. And just as East Timorese farmers and various agencies know the need to improve the quality of local coffee, farmers and governments in coffee-producing countries throughout the world are also endeavoring to improve their crop quality. In this regard, improved East Timorese coffee will not necessarily lead to significantly higher incomes for local farmers as one can expect increasing yields of such coffee in other countries as well, thus leading to greater supply and possibly lower prices. Of course, if East Timor falls behind others’ efforts to improve crop quality, farmers could be hurt even harder by lower prices.

"Fair trade" coffee—by which coffee is sold internationally at prices that ensure a minimum and "fair" income for farmers—is one potential option for East Timorese producers. But present international demand for such coffee is less than East Timor’s annual crop and it relies on the consciousness and good will of individual retailers and consumers. In this regard, the potential benefits of "fair trade" for East Timor are rather limited and would probably only help a small number of coffee farmers.

As the article on coffee in the world economy demonstrates, the route to stable and higher incomes for all coffee farmers is through a regulated international market, one that establishes quotas for producer countries and establishes minimum prices. That such a market no longer exists speaks to the declining power of the "Third World" relative to the countries that dominate the world economically, politically, and militarily—most especially the United States, but also the European Union, Japan, and Australia, who are all buyers of East Timorese coffee. It is also a manifestation of the rising influence of multinational corporations. Given East Timor’s small size and tiny share of world coffee production, this country alone cannot effectively challenge the free market dogma and the unjust trading relations that underlie today’s world economy. But East Timorese civil society and the government, assuming that it has a progressive vision, can join with other governments, coffee farmers and consumers in different parts of the world to challenge the injustice of the international coffee market. Failure to do so will only help to perpetuate the poverty experienced by East Timorese coffee growers, despite the wealth their product helps generate for others.

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La’o Hamutuk, The East Timor Institute for Reconstruction Monitoring and Analysis
P.O. Box 340, Dili, East Timor (via Darwin, Australia)
Mobile: +61(408)811373; Land phone: +670(390)325-013
Baucau office: +61(438)143724; lhbaucau@easttimor.minihub.org
Email: laohamutuk@easttimor.minihub.org 
Web: http://www.etan.org/lh

International contact: +1-510-643-4507, lh@etan.org