US embassy cable - 03HOCHIMINHCITY777

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 
------------------------------------ 
 
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? 
---------------- 
 
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? 
---------------------------------------- 
 
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 
---------------------- 
 
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 
------------------------------- 
 
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