The Indian coffee contribution to the global output is 4 per cent on an average. Of the total coffee production 80 per cent is export oriented and more than 40 per cent is exported to the European nations. The cumulative average production growth for the last two years is 13.10 per cent, of which Arabica production contributed 9.47 per cent growth while Robusta had a significant growth rate of 15.8 per cent. The area under coffee cultivation improved by 3.36 per cent from 3,29,238 hectares to 3,40,306 hectares.

But the contribution towards the global output has remained stagnant. The coffee export growth between 1996 and 2000 is 9.07 per cent. The domestic coffee consumption had a growth rate of around 2 per cent well below the production growth over the years.

This stagnation in the consumption growth combined with the increasing production levels over the years gives an interpretation that the coffee market in India is an export driven market. Having understood the nature of domestic market as export oriented, it is essential to analyse the variety mix of the Indian coffee production.

India produces Arabica and Robusta variety, and the proportion of production of both varieties is balanced over the years. The recent years has shown a trend of producing more amount of Robusta variety than Arabica production. The shift over from the production of Arabica to Robusta is attributed to the following reasons. First, the high export off take of Robusta variety compared to the Arabica exports. Second, the higher cost of production of Arabica variety compared to the Robusta's per unit cost. (The cost of production in India for different varieties ranges from Rs 27-30 per kg).

Indian flavored coffee, which has a potential demand in the European countries, is fighting hard to taste well in the traditional export market. The growth in exports has shown a stagnant picture over the years. This stagnation in export growth can be attributed to the lack of competitiveness in terms of pricing our exports. The coffee market was liberalized during 1996, and since then 100 per cent free sale quota system has been implemented. The government does not intervene in procurement and marketing of coffee. Even after the liberalisation scenario, the Indian coffee prices were above the international prices, when the global prices were at the all time low levels. This is reasoned due to the lack of depth in the Indian market, where few players are dominating the domestic coffee trade and deciding the fate of the coffee prices. This pricing factor has created the barrier in the growth of Indian coffee exports.

Also, Indian coffee market is facing stiff competition from the Asian countries and particularly South East Asian countries like Vietnam, Indonesia, Thailand, and Philippines. The expanding market share of these countries is threatening the erosion of Indian share in the export market. If we look at the domestic coffee prices, Arabica prices have declined by 10.66 per cent (from Rs 75 to Rs 67/kg) while the Robusta prices have fallen by 43 per cent (from Rs 58/kg to Rs 33/kg) during this year from the previous year level. Even this level of price was higher than the international prices. The devaluation of rupee, which is favorable for exports, did not improve the export growth due to the uncompetitive pricing.

With only 4 per cent contribution towards the global export trade unrealistic price level may reduce the market share on the export front. South East Asian countries which were under the financial crisis enhanced their export share due to the favorable export environment. With this structural framework in the Indian coffee market, the international prices at nadir had added woes to both domestic ad international coffee growers.

The initiative taken by the Association of Coffee Producing Countries aimed at reviving the coffee prices through retention of export surplus, which raises several questions in the Indian context. In India there are about 1.40 lakh coffee growers, of whom 1.38 lakh growers posses less than 10 hectares for coffee cultivation. In this kind of fragmented market, adoption of retention scheme which asks for 20 per cent retention of exportable surplus of each country until the prices reaches a acceptable level by the producing countries would further burden the coffee growers of India. If the Indian government opts to procure the retained surplus from the growers at a price, then it is exposing its position to the volatility of the market. And any unfavorable movement in the market may result in heavy losses to the exchequer.

The other constraint in this context is the fixation of price at which the government has to procure from the growers. The second factor would be the amount of finance needed for surplus stock procurement. As per the present requirement of 20 per cent, 45,000 tons has to be procured at a cost of Rs 40 crores. This would burden the government borrowings, as the government is witnessing burgeoning fiscal deficit figures in its account. In the other scenario, if the government does not intervene in the market and growers are asked to retain the surplus with them, then the small growers will be greatly affected because of the following reasons. First, the grower has to forego his current earnings by opting to retain the stocks rather than to sell it at low prices.

The second aspect is the opportunity cost to the grower by blocking his funds for a period until the price go up to the market expectation, and the carrying cost involved in retention. These factors would reduce the monetary return to the grower, and will make huge losses if the market go against his forecast.

The alternative for the grower is to sell the retained stocks to the intermediaries or major players in the market. This would safeguard the position of the grower, but this act would result in the cluster formation, means major players would dominate the price trend in the market. This would totally affect the efficiency in the market in terms of price discovery.

In the external front, adhering to the ACPC retention scheme raises the possibility of erosion of Indian export share in the global market.India faces competition from Vietnam in the export front. As it has the competitive advantage over us in terms of flexibility in pricing the exports. Added that Vietnam is not a member of ACPC, and one of the largest producer of Robusta variety, which again puts Indian exporters at a disadvantage as India grows and exports large proportion of Robusta variety.With low contribution to the global export trade, and joining hands with the major producing players would benefit them more, rather than benefiting the domestic market and the growers who constitute this market.

(Source:www.CommodityIndia.com)