Indonesian Coffee: Cream of the Crop

A Civet eats ripe coffee fruits at a coffee plantation that produces what's thought to be the world's rarest and most expensive coffee in Liwa, a town in Sumatra, Indonesia, on Oct. 7, 2010. (Photo: Tri Saputro, Demotix, Corbis)

In a steamy coffee plantation amid fertile fields in western Java, a young entrepreneur named Gary Sjafwan leaned forward to inspect the freshness of a new, chocolaty tasting, Lembang bean he hopes to take worldwide.

"The taste of the coffee has to do with the stones in the earth," explained Sjafwan, a former geologist, referring to the science of stratigraphy, or a study of rock layers he uses along with organic medicine, to cultivate his harvest. "We focus on the quality." 

Leading Southeast Asia's multi-billion dollar commodities boom with its untold reserves of thermal coal, minerals, natural gas and palm oil, Indonesia is also the world's third-biggest coffee producer after Brazil and Vietnam, and the number-two exporter of premium arabica, a bitter-tasting bean often widely used in instant blends.

As one of the main foreign exchange earners for ASEAN's powerhouse economy—plantation commodities here surged overall by $8.4 billion to $35.7 billion in 2011—the stakes for the domestic industry are high. In a market of Starbucks and Coffee Bean behemoths, Sjafwan and his peers face fast-changing realities, from unforgiving weather to an equally capricious global economy threatened yet again by a swelling European debt crisis.

But the outlook is positive for now, as Indonesian coffee production continues to accelerate. In 2012, in fact, the archipelago's output may reach a 15-year high, predict industry analysts—having grown by 33 percent to 8.3 million bags, at 132 pounds each, since April's season. But heavy output can often be offset by economic woes elsewhere—namely Europe, whose roasters are the big buyers of Indonesian beans—leading to curbs in demand and profits.

Memories are fresh of a global recession where worldwide coffee sales plunged a record 2.6 percent, according to the U.S. Department of Agriculture—the biggest drop in 16 years.

Indonesia's tropical storms create frequent setbacks. After pollination failure following 2010 downpours, the Indonesian Coffee and Cocoa Research Institute reported a 30 percent fall in production to 400,000 tons by year's end. Aging trees also resulted in lower yields; both factors propelled arabica beans to their highest prices in 34 years.

But where a government-led restructuring program has improved quality and productivity, international donors see an industry with short-term problems worthy of long-term investment. The International Finance Corporation (IFC), the financing arm of the World Bank, notably, has identified Indonesian coffee as a key source of $1 billion in development loans for its agricultural projects across East Asia.

For Indonesian growers, stable demand from domestic roasters means prices will likely hold steady at $2,200 a ton—the highest since 2008. In a G-20 economy strongly driven by a fast-growing middle class, the government expects domestic consumption to jump to 1.9 million bags—a 3 percent increase.

People like Rachim Kartabrata, executive director of the Indonesian Coffee Exporters Association, have sought to put growers and traders at ease. "If there are no foreign buyers," he told reporters at a coffee expo in Singapore last year, "domestic roasters will definitely buy."

True to its past as a destination for Javanese coffee—after Dutch colonialists started growing it in the 1700s—Europe now represents 56 percent of importer demand among International Coffee Organizationmembers. In all, E.U. nations consumed nearly 41 million bags of coffee in 2010.

But apart from the E.U. crisis, global optimism exists. The International Coffee Organization estimates that, in 2010, worldwide coffee use recovered by 2.4 percent. And despite increasing prices, this trend is likely to continue, buoyed in part by a world economy the International Monetary Fund anticipates will have grown by four percent over the course of 2011 and 2012.

Against this background, emerging market demands are fast catching up. In the case of China, and elsewhere in Asia, coffee exports mirror heavy trade of Indonesia's other hard and soft commodities. 

Because of already low consumption levels among its 1.3 billion people, China offers tremendous potential. Mainland coffee use, say industry observers, will likely continue at 15 to 20 percent annual uptick as Chinese students return from overseas, coupled with an influx of international visitors to China.

But China's coffee business has its own complexities: A 17 percent value-added tax will soon accompany import tariffs on ground coffee and raw beans up to 30 percent, for a product that has lacked cultural footprint on the Chinese mainland until recently.

With yearly consumption between 30,000 and 35,000 tons and internal output of some 40,000 tons, China stands in stark contrast with global production of 10 million tons. Meanwhile, Indonesia's domestic market—with its population of 235 million far below China's—consumes well over 150,000 tons yearly. 

And in the U.S., the world's top coffee-drinking nation, consumers spent 18 percent more on coffee in mid-2011 than in the same period the year before—three times the increase across all food, according to the Bureau of Labor Statistics.

But perhaps most important of all is one simple, inescapable fact. "Whether people are employed or unemployed, they will still keep drinking coffee," Samuel Nahmias, chief officer of StudyLogic, a U.S. market research company, told Bloomberg News in November. "People still need their cup of Joe."

It's a notion savvy entrepreneurs like Sjafwan, who is opening a partial franchise with his million-dollar business, are banking on. "No one can say this is the best coffee or that one is," said Sjafwan, holding up a green Lembang bean, named for the limestone-heavy soil where it grows, beneath a glistening equatorial sun. "But this is unique."

Joseph Kirschke is a Jakarta-based writer and communications consultant.