FAO Yemen: Assessment Report: Coffee value chain in Yemen - Export potential and investment opportunities

Executive summary

Albeit a niche, coffee is one of Yemen’s most promising sectors with great export potential, providing an opportunity for rural economic development and the diversification of farmers’ incomes. Coffee is planted in only 2.4 percent of all cultivatable land in Yemen (an estimated 34 981 hectares), which yielded coffee production of 20 812 tonnes in 2019 and contributed around 6 percent of all Yemeni agricultural export revenues in 2020: an estimated USD 20.2 million out of a total of USD 320 million.

Located within the global coffee bean belt, Yemen was once one of the world’s major producers and exporters of coffee, with mocha coffee associated with Al Mokha port, historically a major hub for coffee exports out of Yemen. Coffee has been planted in Yemen on mountains and valleys ever since it was introduced and adapted to the arid Yemeni climate, where both rainfed and irrigated varieties are cultivated mostly on terraces. Arabica is the dominant species in Yemen, with two main varieties being planted: Typica and Bourbon. The varieties grown in Yemen tend towards more deep chocolate tonnes, but the natural coffee processing contributes a dynamic winey characteristic that distinguishes Yemeni coffee, which has a different taste from the wide spread Robusta coffee that is sold commercially globally.

Before the conflict in 2015, Yemen’s fish exports reached 50 countries in Asia, Africa, and Europe, yet about 58 percent of the exports stayed in 12 countries in the Arab region. From 2000 to 2010 the average total annual market value for fish products was USD 188 million. A boom was witnessed in 2013 and 2014, when the total exports reached USD 289 million. As a result of the conflict, the fishery export market value shrank substantially, reaching USD 74 million exported in 2018. In terms of volumes of fish produced, fish quantities decreased from 195 370 tonnes in 2014 to 83 865 tonnes in 2019, while the volumes exported reduced from 97 685 tonnes to 31 988 tonnes in the same period.

The coffee value chain in Yemen is largely driven by private sector actors engaged in the production, processing and commercialization of three differentiated coffee products: the commercial and specialty coffee green beans, and Qishr, the Arabic word for husks or peels as well as the special beverage made from them, a.k.a. ‘Yemeni Coffee.’ On average, around 60 percent of Yemeni coffee green beans (including commercial, specialty and Qishr) are destined for export, leaving around 40 percent for the domestic markets. Over the past decades, Yemeni coffee production has been volatile, with production peaking in 2004–2008 only to decline afterwards. Production recovered briefly from 2012–2014, but has not fully recovered since. Exports in turn, increased from 44 000 tonnes in 2000 to 75 000 tonnes in 2005, but since 2014, exports have started to decline sharply, dropping to 36 000 tonnes in 2019. While the coffee bean variety may be the same, what differentiates commercial and specialty coffee is the amount of effort exerted upstream in the value chain at farm level. The amount of care given to the coffee tree (watering, pruning, fertilization, etc.) and in the production of the coffee cherry (picking time, sizing, color, drying and moisture level) marks the difference in the quality of the coffee bean produced and the mark-up received by the coffee farmer. Yemen’s coffee sector is built on the efforts of small-scale farmers, where the average land ownership is around 0.3 hectares (or 394 coffee trees), with an average production of 114 kg of coffee per farmer. From there, traders, wholesalers and exporting companies channel the commercial and specialty coffee to consumers.

Marketing Yemeni coffee, whether commercial, specialty or Qishr, is a major challenge as there is neither price differentiation nor branding. In the domestic market, locally-produced coffee enjoys no special treatment and is sold at regular prices just like any other spice or herb in the market. Coffee is normally marketed through the local spice shops, supermarkets, and grocery stores directly to consumers. Marketing Yemeni coffee in export markets is even harder, as it depends on long-standing business relationships with importers and follows different quality standards. The internet and social media have opened new avenues for marketing Yemeni coffee, and the opportunity for new players to enter the export business. While Yemeni specialty coffee can fetch very high prices in markets that appreciate premium coffee, the high production, processing and marketing costs along the supply chain are major bottlenecks for expanding sales through this attractive market channel. On average, farmers spend 41 to 45 percent of their total coffee revenue on production costs, while operation costs are estimated at 69 percent for processors, 89 percent for domestic retailers, and 60 percent for exporters. For processors, input costs (including coffee beans) account for 45 percent of revenues, but operational, administrative and taxation costs are the highest among all value chain stakeholders: 24 percent due to higher maintenance and operational costs. In the case of domestic retailers, input costs are around 83 percent, which includes the cost of coffee, while operational costs (rent and electricity) amount 6 percent. For exporters, the input costs are at around 45 percent, with operational, administrative and tariff costs adding another 15 percent to their total costs.

The main export destinations for Yemeni coffee products are Saudi Arabia, United States of America and the European Union. In 2019, Yemen exported around USD 20.2 million worth of coffee beans products, up around 11 percent from 2018. Yemen also exports Qishr. In 2019, it exported around 1200 tonnes of Qishr valued at USD 2.5 million, with USD 2.2 million of that coming primarily from Saudi Arabia. The Saudi Arabian market is the top export destination for Yemeni coffee products, accounting for around 63 percent of all coffee exports, valued at around USD 12.6 million in 2019.

The coffee value chain faces major internal constraints, which highlight the need for firm level upgrading and improvements in the enabling environment. The conflict that began in 2015 has severely impacted the countries’ governance, which has divided the country into two warring parties and governments. This has weakened the institutional setup, and outdated policy and regulatory frameworks supporting the agricultural sector as a whole, but with particular impact on coffee. Such division in the governance framework has become a major bottleneck inhibiting growth of the coffee sector, leaving the main value chain stakeholders to contend with two governments and two taxation systems, with regulations and policies that frequently conflict. The conflict has also forced stakeholders to choose sides, often resulting in loss of business and access to markets and services.

Governance of the coffee value chain is split along various mandates of different government organizations, resulting in bureaucratic complexity and contributing to limited government support for the sector. Governance of coffee production is under the Ministry of Agriculture and Irrigation (MAI), while anything related to trading and exporting is under the auspices of the Ministry of Industry and Trade (MIT). The Standards and Metrology Authority (SMA) is the government organization responsible for setting the standards for coffee quality and the description of Yemeni varieties and classification of beans, but it does not have any written standards nor classification for Yemeni coffee beans and its varieties. Testing and certification laboratories, not to mention research centers for enhancing coffee varieties, are virtually non-existent in Yemen. The private sector has picked up the mantle for setting the quality standards, with the Specialty Coffee Association (SCA) of Yemen setting standards for specialty coffee in addition to providing third-party quality verification and testing. Standards and classification for commercial coffee is still unaddressed by any player in the value chain.

Since 2002, the government’s policy has not changed to better support the development of the coffee industry and investments in the coffee sector to increase production and exports. Most of the government stakeholders involved in policymaking and implementation have limited knowledge about the sector, which further compromises the already limited financial and human resources available for support. Yet, since 2017, Yemeni coffee has been gaining traction thanks to the efforts of a few private sector players who have been marketing Yemeni coffee through their own means. While Yemen has agricultural, environmental, water and cooperative strategies, policies, and laws, coffee is rarely cited or targeted. Coffee is only cited when development organizations highlight it as a substitute for qat farming, a cash crop that is water-intensive but nonetheless a major stable source of income for many Yemeni farmers. Recently however, the government’s interest in coffee has picked up as it seeks to use the sector as a means to increase exports and foreign currency reserves. The Internationally Recognized Government (IRG) in Aden and the authorities in Sana’a are both taking steps to regulate the coffee market, promote production and expand exports.

The conflict has severely increased the cost structure for all players along the coffee value chain, making Yemeni coffee less competitive both locally and in export markets. Given the active conflict and the deteriorating transportation conditions, moving coffee to local markets, trade hubs and then to export markets has become riskier and costlier for traders. Most of the coffee production is concentrated in the north, especially in the areas of Sana’a, Sa’adah, and Amran. The economic decline caused by the conflict and the ensuing local currency depreciation and inflation, has resulted in stagnant returns for farmers who are paid in local currency, pushing many to abandon coffee production in favor of staple and other cash crops.

Securing financing in Yemen in general and for coffee specifically has proven to be very difficult, especially for the smallholder producers, which dominate coffee production in Yemen. While some players still have access to loans from family members and local financers (usually the agents/ wakils and wholesalers), this is not always the case. The Government of Yemen instituted a public bank, Cooperative & Agricultural Credit Bank (CAC Bank), and a special fund, the Agriculture and Fisheries Production and Promotion Fund (AFPPF), to support the agriculture sector. Nevertheless, due to the high risk associated with the conflict and economic crisis, the fund has ceased operations and the bank is primarily run as a commercial bank, leaving small-scale farmers to find their own financing avenues. While private sector banks do exist in the market, lending to the coffee sector is almost non-existent.

Investment in the coffee sector has been sporadic and overshadowed by emergency aid. Investments by government and development organizations in the coffee sector have revolved around: 1) technical policy assistance in the form of value chain studies and strategies; 2) investments to increase the production of Yemeni coffee; 3) building the capacities of coffee farmers. No investments were directed towards downstream facilities and activities, thereby limiting the sector’s capacity to improve processing and commercialization of high-quality Yemeni coffee. One of the few investments made recently to the coffee value chain was the international coffee conference organized by Small and Micro Enterprise Promotion Services (SMEPs) – a division of the Social Fund for Development (SFD) – to link farmers and traders with international players. The Arab Spring followed by civil unrest that culminated in the 2015 conflict, has led the redirection of investment towards emergency aid, undermining the capacity development projects intended to support the private sector to strengthen capacities, establish the systems, and build the infrastructure necessary to add value to Yemeni coffee and increase exports.

Along the value chain, several upgrading opportunities are of priority to overcome the challenges that hinder the growth and competitiveness of Yemen’s coffee value chain, which can be largely mitigated with the right investments, policy reforms and technical assistance (TA). These include:

1. Input supply: a) increasing farmer access to inputs, equipment (including irrigation technologies) and training in seedling and organic fertilizer production; b) training the farmer workforce on input production and nursery management; and c) build capacities in new methods and technologies for input production at farm level.

2. Production: a) training farmers in farm management and production practices including intercropping, tree upkeeping and harvesting; b) improving access to finance for the introduction of new sustainable irrigation methods; c) scaling up adoption of soil management software and hardware for better decision-making and expanding the dissemination and use of information for early warning in coffee production; and d) support cooperatives to improve their management, operations and governance in order to provide necessary production and marketing support for coffee farmers, including aggregation and value-added services.

3. Transport and processing: a) increasing capacity and access to capital for investors and groups of investors (production alliances) to expand value-added capacity close to farming areas; b) providing capacity building for farmers for coffee processing in accordance to international standards and preferences; c) strengthening cooperatives to expand drying centers at the village level and supporting farmers in value addition (processing methods, flavor customization); and d) establishing coffee hubs to provide coffee farmers, cooperatives, and traders with access to warehousing, milling, sorting, roasting and packaging facilities following international standards, provide classification of Yemeni coffee beans, and facilitate access to technical advice.

4. Marketing, support services and enabling environment: a) improving coffee quality through accreditation and quality assurance certification; b) developing the Government of Yemen’s capacity for export promotion through the development of specialized economic/agrifood attaches in target export countries; c) building and equipping laboratories with better service provision capacity (processes and knowledge of standards), improved equipment, and human resources with skills for state-of-the-art testing techniques and official hazard analysis and critical control points (HACCP) control implementation; and d) assisting the government in building up an automated online information system that is openly accessible and caters to the needs of different stakeholders along the coffee value chain.