UNEP’s analysis focus on identifying the most accessible economic routes for the transition to intercropping for smallholder farmers.
Intercropping with avocado, durian or Cassia siamea in combination with pepper, provides economic benefits to a smallholder over a 25-year period when compared with rejuvenating a coffee plantation in a single year, or a five-year or ten-year period.
Table 1 shows the economic value in terms of net present value (NPV) and internal rate of return (IRR) and breakeven point (the point at which capital expenditure and additional revenue are equal) for a smallholder converting to intercropping with durian, avocado, Cassia siamea or cassia siamea/pepper in either a single year, or a five-year period.
Table 1: Comparing the economic benefits of different cultivation options for a smallholder, ranked by NPV*
Capital and operational costs of transitioning to intercropping
The introduction of intercropping to a coffee plantation provides substantial economic gains when compared with a coffee-monocrop, however, positive returns are not realized until after the replanting phase, leading to a substantial income gap for smallholders. During these initial years the smallholder would have lower income from their planation and still face substantial capital expenditures associated with the conversion (purchase of seedlings, land preparation and planting, etc.), and ongoing operational expenditures, primarily comprised of agricultural inputs for the subsequent years.
This misalignment between cashflow and expenditure requirements means that conversion to an intercropping model may not be affordable for many smallholders. This is highlighted in table 3, which shows the capital and additional operational expenditure required to convert a coffee smallholding to intercropping and the ratio of net income/capital expenditure.
The net income to capital expenditure ratio provides insight into the affordability of an investment. The negative ratios shown in table 2 indicate that without savings or additional financing, it would not be possible for smallholders to generate sufficient cashflow to for the capital and operational expenditures required to transition intercropping.
Table 2: Total capital and operational expenditure for conversion to intercropping models and the minimum coffee price necessary to achieve required free cash flow to self-finance the conversion for two plantations, 10 and 23 years old (price - thousands VND, Coffee price = thousands VND/tonne).
These prohibitive costs are magnified when margins are depressed due to low market prices. This means that smallholders are even less able to consider longer-term investments that can improve a smallholder’s livelihood and quality of life is further suppressed, this affecting both a smallholder’s ability to self-finance the investment as well as the credit risk they pose to a lender.
However, our analysis identifies three that can be taken to make the conversion to intercropping more accessible for poorer smallholder households:
1. Reducing operational expenditure through technical training programmes
The most significant investment cost for smallholders the initial investment is in labour for land preparation and planting. Operational expenditures are mainly comprised of agricultural inputs: fertilizers, pesticides and herbicide as well as labour for weeding, watering, spraying, pruning and harvesting.
Figure 1: Annual cost for one-year conversion to intercropping with durian
As shown in figure 1, the most significant single operational cost is due to fertiliser application. Our analysis shows that the application of synthetic fertilizer can amount to as much as VND 70million/ha/year. Training in fertilizer application could therefore lead to great benefits for smallholders. Indeed, this analysis shows that even a modest reduction in fertilizer application of around 5-10% will lead to a large impact on the financial gains for the smallholder. For example, at coffee price of 32,000 VND/kg, reducing the amount of synthetic fertilizer applied by 10% will increase the NPV from -12 million, to 62 million VND, with an IRR of 13%, implying that the model is economically profitable, even at a 20% lower price for coffee.
Reducing the application of synthetic fertilizer and other inputs would not only reduce the cost of production of Robusta coffee, thereby increasing the profit margins for smallholders, but it has also been reported to have a positive feedback effect on soil health and structure, which could in turn lead to further reductions in the need for agrichemical application and irrigation,
2. Increasing conversion period for transitioning to intercropping
Our analysis shows that increasing the conversion period from intensive mono-crop cultivations to intercropping will lead to a reduction in the NPV of the production system over a 25-year lifetime; A more rapid conversion introduces younger, more productive plants more quickly to the farm, which are able to compensate for the less productive coffee.
However, while a rapid conversion is economically more beneficial for smallholders, it bears a higher capital burden, making it inaccessible for poorer, smallholder households.
A longer conversion has the potential to spreads the total capital expenditure over a longer period, making it more affordable for smallholders. This can be seen in table 3, which compares the net income to capital expenditure ratios for conversions of different length.
Table 3: Net income/ cap expenditure ratio for a 1-year, 5-year and 10-year conversion to intercropping or a 21-year old plantation.[1]
3. Initiating the conversion earlier in the lifecycle of a coffee plantation
After an initial period of growth, coffee yields decrease over time, leading to a reduction in revenue for smallholders. The plantations of smallholders who initiate a conversion to intercropping later in the lifespan, will be less productive, and therefore provide less revenue. Initiating a conversion while coffee plants are younger means higher revenue can support the additional capital and operational expenditures required to shift to intercropping.
Initiating a conversion to intercropping at an earlier point in the plantation lifespan enables smallholders to benefit from higher positive cash flows, generated by younger and more productive crops. Smallholders are therefore more likely to generate sufficient cash flow for the capital and additional operational expenditure required for the transition to intercropping, if they convert towards the beginning of the typical lifespan of a coffee plantation.
Table 4 compares the net income to capital expenditure ratio for a single year conversion to intercropping initiated at different stages in the coffee plantation lifespan. The table shows that, for each of the scenarios modelled in our analysis the ratio of net income to capital expenditure was the same for a conversion initiated in a 7-year old planation as a conversion initiated in a 14-year-old plantation. This is consistent with the yield curve of coffee, which begins to decline after it reaches maturity, after 14-years. As can be seen from Table 4, conversions in a younger plantation have no need for additional capital and can potentially be self-financed by the smallholder.
Table 4: Net income to cap expenditure ratio for a one-year conversion to intercropping for a 10-year, 15-year and 20-year old coffee plantation.
[1] Many of the coffee plantations that are in existence today in the Central Highlands, were originally planted in the late 1980s and during the 1990s after the land privatization policies. According to the World Bank, the recommended age to replant coffee trees in Vietnam is about 25 years, after which the yields deteriorate significantly.
