Coffee economy of Kerala-an analytical study

Abstract

Coffee is considered as the favourite drink of civilized world and the second largest traded commodity after petroleum. For many nations in the tropic, coffee is a major source of foreign exchange. India is the third largest producer and exporter of coffee in Asia. The trade liberalization policies have brought challenges as well as opportunities for plantation crops including coffee because of the increased integration of the country with the world, with serious implications for price stability and trade competitiveness. In this context, the present study was undertaken with the objectives; to study economics of coffee cultivation and marketing, asses the implications of changes in prices at farm level and constraints in production, analyse the price behaviour, formation and transmission between Indian and international markets, study the magnitude and determinants of volatility in prices of coffee and analyse India’s export performance and competitiveness in coffee trade. The total cost of cultivation and production of coffee in Kerala state were estimated as ₹1,51,877 per hectare and ₹67 per kg respectively, while the net return was worked out as ₹41,652 per hectare. The major marketing channels identified for coffee were, Channel I: Farmer-Wayanad Social Service Society (WSS) - Consumer; Channel II: Farmer-Village Trader-Wholesaler- Up-country Wholesaler-Retailer-Consumer; Channel III: Farmer-Brahmagiri Development Society-Consumer (BDS); Channel IV: Farmer-Exporter-Consumer and Channel V: Farmer-Exporter-Export Agent-Consumer. Majority of the farmers (52 per cent) sold their produce to the WSS, while 21 per cent farmers sold to village traders. The marketing efficiency was relatively high in channel I because of the highest producer’s share in consumer’s rupee, while it was lowest in channel V. The changes in farmgate prices of coffee influence the farm level decisions of coffee farmers by affecting their decisions on inputs, special benefits provided to farm labourers, health care expenses, savings and borrowings. Among the ii constraints faced by coffee farmers, low farmgate price, climatic issues and lack of irrigation facilities were critically constraining coffee cultivation in Kerala. The intra-annual volatility of Indian and international monthly prices of coffee declined marginally in period II and III, while the inter-annual volatility of Indian and international monthly prices of coffee increased in period II and III. The results of the instability analysis in annual coffee prices showed that the magnitude of volatility indices have increased in period II, while it decreased in period III. The determinants of price volatility of coffee were identified as production and consumption at national level, Rupee-US Dollar exchange rate and climatic factors such as temperature, rainfall and relative humidity. The co-movement between the coffee prices in the Indian and international markets was confirmed in period I, II and overall periods, while there was decreased integration in period III. The Error Correction Model (ECM) indicated the presence of short-run disequilibrium between the Indian and international prices, which got corrected with varying speeds of adjustment. The Granger causality tests confirmed that the price transmission was from international market to Indian market in the long-run. The rate of growth and instability in coffee export decreased in the post-WTO period as compared to the pre-WTO period. The export unit value contributed 108.20 per cent growth in the export value of coffee between pre- and post-WTO period. Nearly 83 per cent of change in the export value variance between pre- and post-WTO period was found to be due to the changes in the variability of export unit value variance. The geographic concentration of coffee exports from India was high in preWTO period, while it decreased in the post-WTO period. There was a changing pattern in the stable export markets for Indian coffee and Germany, Italy and, Japan were found to be the most stable markets in the post-WTO period. The Nominal Protection Coefficient (NPC)) was greater than one (1.25) in the post-WTO period, indicating lower export competitiveness of Indian coffee. iii The challenges in coffee cultivation can be addressed by implementing awareness programmes on optimal input usage and providing irrigation development subsidy to the farmers. A market intelligence system with the crop specific price stabilization mechanism is needed to tackle the high volatility in coffee prices. A stable income for coffee farmers could be ensured by value addition and branding of coffee at the farm level or in cooperative lines. More transparency is required in the marketing channels to reduce the asymmetric information flow to the farmers. In order to promote the export and improve India’s competitiveness, farmers should be encouraged to produce high quality coffee at reduced cost and the country also needs to formulate trade policies for stable export markets and develop strategies for entry into non-traditional export markets.