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Origin Focus – Vietnam – Part 1

Vietnam At-A-Glance

  • Production: Avg ~29m bags, last 10 years

  • Coffee Types: Robusta (96%), Arabica (4%)

  • Coffee Harvest: Oct-Jan

  • Key Regions: Central highlands (Robusta), south provinces (Arabica)

Why Vietnam Matters

With an annual output of approximately 30 million bags, Vietnam has solidified its position as the world's largest Robusta producer, boasting an impressive 40% share of the global Robusta market and nearly 20% of the total coffee market. In Robusta terms, even coffee powerhouse Brazil trails at a distance. What's also impressive is the relative speed with which Vietnam has grown to become a top coffee producing origin, rising from ~1m bags in 1990 to 29m bags in 2020. With Robusta prices at all-time highs, we may well see this origin’s production take off to new highs as well.

Given the global dominance of this origin, any shifts in Vietnam's production trends directly impact coffee prices, supply levels, and overall demand. For instance, the current shortage and high differentials in Vietnam have contributed to the record RC futures prices over a 10-year period. This impact on global prices is derived not only from the massive scale of the country’s production, but also its utility as “filler” for coffee blends. This status as the world’s source for blendable caffeine makes it an essential, price-sensitive component of many roaster’s blends the world over.

Moving forward, Vietnam’s coffee industry isn’t solely fixated on cheap, mass production but is gradually pivoting towards a focus on producing higher-quality coffees. More on this later.

At present, Vietnam has become the world's benchmark for Robusta coffees, shaping the expectations and standards for this type of coffee globally. As such, it’s essential for Roasters, futures traders and analysts to have a clear understanding of this important origin. In this article, we will explore Vietnam’s role as a coffee origin, its production development history, and shed some light on the key aspects and trends you need to be aware of.

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History of Production

Although interest in Vietnamese coffee cultivation began in the mid-1800s with the French, Vietnam only recently became a powerhouse of production. In the early 90’s, as the Vietnamese government instituted market reforms, production began to massively increase and formed an uptrend that would soon establish Vietnam as the dominant Robusta coffee producer.

Prior to these reforms, production faced significant disruptions due to the Vietnam war, resulting in losses of people and lack of workforce to the coffee industry. However, in 1986, Vietnam embarked on economic reforms that marked a pivotal moment for its coffee industry. Before this, the government had restrained and limited private enterprise activities, but the introduction of the Doi Moi economic reforms allowed for privately owned enterprises to emerge while private land use rights were recognized.

As a result, the area dedicated to coffee production experienced exponential growth, as indicated by studies analyzing this phenomenon. This impressive surge in coffee production, boosted by private incentives, propelled Vietnam's coffee market share from a mere 0.1% in the late 1980s to an impressive 20% in the present day, showcasing a remarkable thirty-year timespan of progress and expansion.

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Since then, the production trend has been volatile (although generally rising) but struggled to pass the 30 million bag mark. The volatility highlights some of the main influences on local coffee production. The influences (both positive and negative) that have been a major factor in the past, are very likely to continue affecting Vietnam coffee production in the future. Most notably: price and weather.

Drought is the primary weather problem faced by Vietnamese coffee farmers but in the early 2000s, they experienced wrath from both ends of the weather. This included a historic flood in 2000 and a subsequent period of drought in the Central Highlands, this double whammy of destruction led to a significant decline in coffee production that set the country back for several years.

However, following the weather-related challenges in the early 2000s, coffee production in Vietnam again began to rise, but this growth eventually hit a ceiling for multiple reasons, with low prices being a major factor. The smallholder farms are heavily relied on monocrop practices, which made the industry sensitive to fluctuations in coffee prices, creating strong incentives or disincentives for production.

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During the late 2000s, the Robusta (RC) price fell by 24% between 2007 and 2008, leading to a retracement in production, which mirrored the crop price trends. Moreover, the El Niño event in 2006-2007 also disrupted rainfall. Although it was considered moderate by El Niño standards, it added additional challenges to Vietnamese coffee producers.

Low prices didn’t last however, and Vietnamese production surged from 2010 to 2011, fueled by a remarkable 116% rally in Robusta prices within a span of just one year. The surge was partly a response to a shortage of coffee in Indonesia, where production fell by 25%. With large price incentives, Vietnam's coffee production soared to new record levels, experiencing a remarkable 36% increase towards new records (26m bags), with Vietnam meeting the challenge for increased demand amid Indonesia's shortage.

From 2013 onwards, Vietnam's coffee production somewhat stabilized around 28 million bags, with a lack of significant increases in output. Several factors contributed to this ceiling, including a downtrend in Robusta prices, intensified competition from Arabica and weather-related challenges.

The decline in Robusta prices was stark, plummeting by 50%, from $2200 in 2013 to $1100 in 2020, consequently impacting the industry's profit margins. Additionally, Arabica coffees were getting increasingly cheaper during the same period, which escalated competition. Moreover, adverse weather conditions emerged in the form of reduced rainfall and rising temperatures. The 2015 El Niño event, for instance, exacerbated these issues, contributing to countering any potential rise in coffee output during that period.

Vietnam currently stands at an exciting juncture for the future. Given the recent surge in Robusta prices, reaching their highest point in 12 years, and considering Vietnam's production has shown itself historically correlated to Robusta prices, one cannot help but ponder whether this signals an upcoming surge in production there.

Demand for Vietnam Coffee

Internally, coffee consumption in Vietnam is significant. Although it does not reach massive levels, due to the prevailing tea culture in the country, an approximately 2 to 2.5m bags of coffee produced in Vietnam are consumed domestically. This represents an above-average consumption level for a coffee origin, centered around Robusta, with little consumption of Arabica within the local market.

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However, the bulk of Vietnam's production, ranging from 90% to 95%, is geared towards exports. As a result of its substantial coffee production and export capacity, Vietnam stands as the second-largest coffee exporter worldwide and proudly holds the title of the world's largest Robusta exporter. Several countries constitute the top consumers of Vietnamese coffee, with Germany leading the pack, followed by the United States, Italy, Spain, and Japan in descending order. The global appeal of Vietnamese coffee is evident, as it’s the significance of coffee to Vietnam's economy (8% to 9% of the GDP).

Since the global Robusta demand heavily relies on Vietnam, the country effectively dictates the pricing trends for Robusta beans, as it’s been the current case with limited supplies and high RC prices. Although a dark roast and a bitter bean profile are prevailing there, these are rejected by the specialty coffee industry, which is known for paying high premiums to coffees.

The historical approach in Vietnam has been to prioritize quantity over quality, catering to the demand for roaster blends. However, production of high-quality coffee has been expanding in Vietnam, as producers and exports appear to search for higher prices for their coffees in the international markets, in the wake of declining Robusta prices over the past decade.

To be continued at part 2: production regions & weather in Vietnam

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