COFFEE AND COCOA IN DAK LAK PROVINCE -- THE POT

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000777

SIPDIS

SENSITIVE


E. O. 12958: N/A
TAGS: ECON EAID PREL EINV ETRD EAGR SOCI VM
SUBJECT: COFFEE AND COCOA IN DAK LAK PROVINCE -- THE POT
AIN'T BUBBLING OVER


1. (U) Summary: Hopes for economic prosperity in Vietnam's
Dak Lak province remain centered on agriculture, especially
cash crop coffee. While low coffee prices have meant
continued slow growth, they have also spawned
diversification programs. During a visit to the largest of
the four Central Highlands provinces July 23-24, the
Ambassador met with provincial authorities and private
sector businessmen to gain their perspectives. End Summary.

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Dak Lak: Growth Through Agriculture
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2. (U) Dak Lak People's Committee Chairman Nguyen Van Lang
cited an overall economic growth rate of over seven percent
(five percent in the agricultural sector) as proof of his
province's economic success. Dak Lak leads Vietnam in
coffee production, grows 30 percent of the nation's corn,
and produces 60 percent of its cotton. Dak Lak also
produces fertilizer and animal feed. Provincial authorities
have used a combination of central government funding and
foreign aid for agricultural diversification and
infrastructure improvement projects.

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Dak Lak Coffee Not Just For Weasels Anymore
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3. (SBU) DakMan, a joint venture owned 66 percent by London-
based ED&F Man and 34 percent by Dalimexco, a Vietnamese
state-owned enterprise, was one of the first joint-venture
coffee companies to operate in the Central Highlands. The
factory was also one of the first to use an automated
process to sort, grade, dry, and package the beans,
according to Jonathan Clark, director of DakMan's Dak Lak
operation. The beans are untouched by human hands from the
time they are put in the silo until the time they are
packaged for shipping. As with most exporters, DakMan does
not roast its beans in Vietnam, but exports only green
coffee.


4. (SBU) Mr. Clark thought the quality of coffee currently
being produced was sufficient to satisfy demand. The market
does not offer enough of a premium to clean up the coffee
beans, since the many small producers who process and sell
to exporters can earn more selling bags of "dirty" coffee
weighed down with sticks and twigs. Given the low costs of
production in Vietnam, Mr. Clark believes the average
Vietnamese farmer earns a higher percentage on his coffee
than do his peers in other countries.


5. (SBU) Like most processors in Dak Lak, DakMan processes
only robusta coffee, not the more expensive arabica. In
southern Vietnam, only farmers in Lam Dong Province can grow
true arabica coffee, which requires elevations above 750
meters, and even Lam Dong grows very little. (Post Note:
The main arabica-producing regions are in northern Vietnam.)
Most Vietnamese coffee marketed as arabica is actually a
robusta-arabica hybrid called Catimor. While Catimor is
inferior to true arabica, the price of producing arabica in
Vietnam is simply too high. Sadly, Mr. Clark dispelled
urban legends that high priced "weasel" coffee continues to
be processed through the digestive system of its namesake
animal, describing the use of chemical additives to produce
the distinctive taste and aroma.


6. (SBU) DakMan purchases from suppliers throughout the
province, with state-owned farms accounting for nearly 25
percent of production. Many of these farms are slowly
privatizing. While DakMan rejects about 7.5 percent of the
coffee it purchases, the rejects are often repackaged and
resold to DakMan or other exporters. There is a proposal by
the Dak Lak provincial government to create a centralized
coffee-trading center, which Mr. Clark hopes will increase
price transparency for buyers.


7. (SBU) Mr. Clark believes Vietnam's coffee industry is
fundamentally strong, and will rebound with the expected
rise in coffee prices. The current price slump would
benefit Vietnam's coffee producers in the long run by
driving out competition from less efficient growers, like
those in Africa. DakMan is the only coffee company in the
province to hedge its risk with an active futures trading
group (based in London). Most major producers in Vietnam
now had Reuters machines to track the coffee futures market,
which opens at 4:20 p.m. local time. DakMan's competitors
use the spot close price from the previous day in contract
negotiations.

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A Cocoa Revival?
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8. (SBU) Mr. Clark also mentioned that DakMan was partnering
with the Vietnamese Agricultural Science Institute in a
provincially funded US$5.1 million diversification project
to promote cocoa production. Farmers in the Central
Highlands had pulled out their cocoa trees more than 20
years ago when they could no longer find a market for their
crop. Now, Dak Lak should be ready to begin exporting cocoa
again in about three years. USDA and USAID, in conjunction
with the American Cocoa Research Institute and the World
Cocoa Foundation, have also started funding a project to
test cocoa production in Dak Lak.

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Trung Nguyen Coffee: The Next Starbucks?
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9. (SBU) Administrative Chief Nguyen Van Thu showed off
Trung Nguyen Coffee's impressive new headquarters building
in Buon Me Thuot, the capital of Dak Lak Province. Trung
Nguyen LLC, still privately owned by the family who
established the company in 1995, has attracted public
attention as one of the country's most highly successful
Vietnamese-run private enterprises. Trung Nguyen's
management has made no secret of its desire to become the
Vietnamese equivalent of Starbucks.


10. (SBU) Although turnover remains quite modest, Trung
Nguyen now exports to nine countries worldwide -- Canada,
Germany, Australia, Malaysia, Singapore, China (including
Hong Kong),Japan, Canada, and the USA. The company applied
to register its brand in the U.S. in May 2002, and Mr. Thu
believes they are close to overcoming a trademark dispute
with their U.S.-based importer, Ricefield Corp. Trung
Nguyen has already opened retail stores in Thailand and
Japan, but Mr. Thu was interested in learning more about how
to break into the U.S. market.


11. (SBU) Currently the Vietnamese consume only one kilogram
of coffee per person on an annual basis. Yet while Vietnam
remains primarily a tea drinking culture, coffee consumption
is growing at 25-30 percent per year. Trung Nguyen is
aggressively franchising its name to target the domestic
market. The company charges a uniform, one-time initial
franchise fee and requires the franchisee to serve only
Trung Nguyen coffee. While the earliest franchisees were
not held to any particular design standards, plans call for
future franchises to reinforce the brand image with a
standardized look and feel. Trung Nguyen has thousands of
shops nationwide, with 200 in Buon Me Thuot alone. The
company also owns an undisclosed number of cafes and shops
directly.


12. (SBU) Trung Nguyen purchases coffee from all four
Central Highlands provinces and strives as much as possible
to use either "clean" coffee grown with minimal application
of chemicals, or organic coffee. They have worked with the
Vietnam Coffee Association to advise farmers on how to grow
clean coffee. While Trung Nguyen deals primarily in robusta
coffee, Mr. Thu thought Vietnamese farmers were increasingly
interested in growing higher-priced arabica beans, but
agreed with DakMan's Clark that only parts of Lam Dong
Province were suitable.

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Honey Situation Sticky
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13. (SBU) Dak Lak Department of Planning and Investment
(DPI) Director Do The Thu dismissed reports from the
Vietnamese press that Dak Lak honey was suffering from poor
quality control and that the export market was down as a
result. He acknowledged, however, that high honey prices in
2003 had led some smaller operations to mix honey with
sugar, producing "fake" honey to make a quick profit.
Provincial officials are publicly discouraging this
practice. He reported that 160,000 bee swarms had already
produced 4,000 tons of honey in the first half of 2003.
Most Dak Lak honey is produced for export.


14. (SBU) Director Thu stressed that the Dak Lak beekeeper
association would try to do more to control export quality,
especially at the production level. The province plans to
purchase equipment for measuring honey quality, but such
equipment is expensive. The Ambassador suggested this might
be an area where the U.S. could provide some assistance.

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Overseas Development Assistance
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15. (SBU) According to Dak Lak DPI, active foreign aid
projects are funded by Denmark (Danida),the Asian
Development Bank, the World Bank, Japan, Finland, and
Germany. Danida had sponsored a just completed US$19
million clean water program, and was currently supporting a
drainage system project and an administrative reform project
for the civil service. Germany provides advisors and credit
for equipment imports for pilot projects in sustainable
agricultural development and clean water. The World Bank
and Japan are both funding traffic management programs.
Construction of a new hospital is slated to begin in 2004 as
part of a larger ADB project for Central Highlands
development. The World Bank's rural electricity program had
added four communes to the Dak Lak power grid and would
satisfy remaining rural electrification demands by adding an
additional 48 by the end of 2003. Noting there were
currently no U.S. aid projects in the province, and only
sporadic activity by small U.S. based NGOs, the Ambassador
offered to work with the Dak Lak to find ways to provide
assistance.

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COMMENT
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16. (SBU) Dak Lak provincial authorities were not very
responsive to the Ambassador's suggestions for direct U.S.
aid projects, and offered few ideas for projects with
American NGOs. Referring to "legitimate" projects and
organizations, provincial leaders implied U.S.-run efforts
might be used for other purposes. Although Dak Lak officials
have agreed to a USDA/USAID cocoa project (likely because of
keen local interest and limited direct USG involvement)
officials are still reluctant to agree to most forms of USG
assistance. Dak Lak continues to be one of the most
xenophobic provinces in the country, with its authorities
convinced that any foreign presence could be a cover for
support of Montagnard political separatist activities.
(Post Note: The Japanese Consulate General was denied
permission by provincial authorities to visit a school that
was being constructed with official development aid last
year. The Japanese have not tried to visit that project
again.) DakMan's Clark noted that the number of expatriates
living in Dak Lak was down to around 20, about half of what
it used to be.


17. (SBU) Even with diversification efforts underway, Dak
Lak's economy is still heavily dependent on coffee and
coffee prices. There are concerns that if Vietnam enters
new markets like cocoa, in the same way it entered the
coffee market, the dramatic increase in supply will cause
prices to plummet. In a further blow to the local economy,
Dak Lak has closed its Buon Me Thuot airport temporarily.
While the airport is scheduled to reopen in September 2003
with a runway capable of supporting Airbus A320s, projects
like this have a way of falling behind in Vietnam.

YAMAUCHI