Globalist Analysis

Another Kind of Buzz from Vietnam

Why is Vietnamese coffee creating a major headache to South America?

How does Vietnamese coffee threaten South America?

Takeaways


Vietnam has been hailed as the next Asian tiger for years. Yet, it would make an odd Asian tiger.

Most tiger countries in the region — including neighboring Thailand, Malaysia and the Philippines — use their cheap labor to develop manufacturing or assembly operations.

They seek to move up the technology curve to make higher value-added products. Not so the Vietnamese. Vietnam's Communist government still seems to prize agricultural production above all else.

In recent years, it applied the organizational skills and dogged persistence that characterized economic planning to developing one particular crop — coffee.

The coffee crop is not new to the country. In 1857, French colonists introduced the beans to Vietnam's central highland regions. Colonizers and colonized alike quickly came to enjoy the new brew.

The Vietnamese even incorporated the French word café into their language. In addition, as far back as the early 20th century, the country became a major coffee exporter. Of course, that business went down the drain once the war devastated pretty much the whole country in the 1960s.

Now, the Vietnamese are back on the global coffee trading floor, concentrating on a hardy, high-yielding type called robusta. That particular sort of coffee is much easier to grow than for example Arabica.

In the process, Vietnam has become a global coffee-growing power to be reckoned with. In the early 1990s, it produced only two million bags per year.

Yet, only a decade later its coffee production jumped sevenfold. As a matter of fact, Vietnam recently surpassed Colombia to become the world's second-largest coffee producer — after Brazil.

Being a low-cost producer, the massive amounts of Vietnamese coffee now available in world markets depress the price. Not surprisingly, U.S. and European food companies and coffeehouse chains have began buying Vietnamese coffee.

This move happened even though its quality was inferior not only to the Kenyan varieties — but also to most Latin American coffees.

All of this looks like a replay of a by now familiar story. Asian manufacturers last ran into trouble in 1997.

Back then they suddenly woke up to the harsh reality that they produced more manufactured goods than the rest of the world would possibly consume.

The Vietnamese, likewise, have become the victims of their own success — by helping to undermine the world coffee market. The price of coffee went from $1.80 per pound in 1997 to less than 50 cents.

Even in Vietnam, that does not cover the cost of production. Not to mention Latin America, where the regional cost of production works out to almost $1 per pound.

And the problem looks intractable: According to Oxfam, the international aid organization, every year 8% more coffee is grown than is consumed. For traditional coffee producers, such as Brazil, Colombia and Peru, the situation in the world coffee market spells disaster.

But major coffee users around the world benefit, of course. Companies that package and sell coffee in rich countries' markets have seen their profit margins go up.

After all, nobody has noticed any decline in the cost of, say, a cup of Starbucks "Tall Latte", for example.

Of course, companies seek to maximize profits and are likely to favor cheaper inputs for their products over more expensive ones.

But for U.S.-based corporations, in particular, one wonders: Is it really such a far-sighted business strategy to help destroy the Latin American coffee industry? Especially, when it only adds to another problem — drugs.

Cocaine competes with coffee as a cash crop in the same Central American countries. In fact, in Peru, farmers who get tired of taking huge losses on their coffee harvests are increasingly switching to more profitable coca — which earns them more than seven times as much money per pound.

One can only imagine what this does to the rural infrastructure in the coffee-growing regions of Latin America. Coffee was one of the few industries that led to dependable economic structures there — or so the people involved in the industry thought.

Now, the coffee caravan has largely moved on — despite Latin American producers having the superior product. At the same time, acting under U.S. pressure, some governments in the region have been systematically destroying coca plantations.

Ironically, in this area they could probably benefit from the extensive expertise of aging U.S. Army generals — acquired during their years of jungle defoliation in Vietnam.

Ultimately, this whole turn of events may once again be the fault of the French. As the former colonial power in the country, they were the ones to build up a coffee culture in Vietnam about 120 years ago.

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