Economic Update

With a major project backed by the World Bank getting under way and a sizeable budget allocated by the government, Papua New Guinea’s state-run coffee industry has significant potential for expansion in 2012.

In mid-December Navi Anis, the CEO of the Coffee Industry Corporation (CIC), invited proposals for the coffee component of the $46.3m Productive Partnerships in Agriculture Project (PAPP) funded by the World Bank.

The news came a week after the country’s 2012 budget was announced, with PGK2.9m ($1.32m) allocated to the CIC and PGK14.59m ($6.63m) slated for agriculture and livestock as a whole. Coffee exports rose in value by 20% in 2010, according to the Asian Development Bank.

PAPP aims to improve smallholder productivity by strengthening the links between smallholder farmers and agricultural businesses, with a target of adding 25,000 households to the list of registered producers of certified coffees by 2016. The industry currently employs approximately 2.5m of the country’s 6.6m population. The project will also work towards increasing access to farming technologies and services and improve the coordination of agricultural institutions.

Up to the third quarter of 2011, the prices of Papua New Guinea’s cash crop exports (particularly coffee) returned to or exceeded the highs of mid-2008, when Papua New Guinea’s coffee industry set a record export earning of PGK508.8m ($231.59m). Meanwhile, other major producers – such as Brazil, Colombia and a number of African countries – experienced a sharp production decline, which has pushed up global prices.

Through the PAPP the World Bank will work with lead partners with an annual income of more than PGK3m ($1.37m), as well co-partners involving between 100-250 farmers. It will deal with varying needs of the sector, including extension, postharvest, equipment and marketing infrastructure. The project manager, David Freyne, told local media in August that the PPAP would provide 70% of the total project cost, with the lead partner and co-partner together meeting the remaining 30%.

Coffee has been the most important crop in the country’s economy since its period as a Dutch colony, drawing in foreign exchange and creating jobs. The crop was once cultivated on large estates but is now mostly grown by smallholders in the tropical Eastern and Western Highlands. Major markets include the US and Europe, with large coffee firms in those markets taking the bulk of green bean exports, principally Arabica.

With around 2000 mm of rainfall each year, an altitude of 1500-2000 metres, optimal temperatures and naturally fertile soil, the Highlands are ideal for growing coffee. About 85% of the country’s commercialised food and fresh produce is also produced here.

However, smallholders are facing constraints to market access, which can lessen farm-gate prices and reduce incentives to invest. A World Bank report in 2009 found “little evidence that government attempts to improve smallholder processing have been effective, most importantly because individual households do not receive appropriate price signals for their efforts to improve their processing and post-harvest handling techniques.”

Another potential limiting factor for the coffee industry is the resource boom that is currently taking shape, with fears that it may impact labour resources. Industry experts told local press in April 2010 they were concerned the large liquefied natural gas plant slated for construction in the Southern Highlands would “lure the entire workforce away from the coffee plantations,” significantly affecting export earnings.

“The influx of labourers migrating to the Southern Highlands will have a severe impact on our coffee plantations,” warned Ben Temon, the former head of industry affairs with the CIC. The plant is expected to double the country’s GDP when it comes online in 2014.

In a bid to improve coffee’s export potential the CIC has been working with the Australian government to give smallholders more technical experience. For instance, AusAid, via the Agriculture Innovative Grant Scheme, funded a coffee quality project in August that aimed to help smallholder farmers enter niche markets overseas. The industry has also seen increased interest from East Asia this year, with Japan’s Kanematsu Corporation visiting the country in late August to discuss a canned coffee project that envisions annual coffee sales to Japan rising by 75%.

Some farmers have complained that the World Bank should have focused on palm oil rather than coffee, arguing that palm oil, which is principally used for cooking, has provided considerably more benefits to smallholders in rural areas in Indonesia. However, the World Bank suspended International Finance Corporation funding for crude palm oil projects in 2009, citing the destruction of forests in Indonesia due to industrial palm oil development.