Coffee Cultivation in Costa Rica: History, Competitive Advantages and Weaknesses

Introduction

Coffee is one of the important commodity that is traded in the world. Costa Rica has a long history in coffee production. Over the last 200 years Costa Rica is exporting coffee. Most of the plantations in Costa Rica has shade-grown coffee and these coffee plantations are environmentally friendly. Revenue from coffee export helped Costa Rica to build a highly social progress country in par with Italy or Korea. However "modern" production techniques that costa rica implemented in late 80's and 90's to increase the yield had some major drawbacks.

These "modern" techniques harmed the environment and commoditization of coffee pushed the coffee price further down and currently a large number of farmers are not making profit from coffee plantation and the industry is on the verge of collapse. However, recent programs and initiatives by the Costa Rican government and other agencies seem to be promising and we suggest to the "AEQUITAS" board to keep the operation in Costa Rica and invest in the more sustainable process for coffee manufacturing.

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History of Coffee and Coffee Cultivation in Costa Rica

Ethiopia was the first country to trade coffee in the international market. Initially, it was used as a medicinal drink and later people started to use it as a stimulant drink.Soon Coffee became part of everyday life as it increased energy with no major side effects. Later coffee was successfully grown in south-east Asia, India and another part of the world. By the 16th century many western Europeans started to enjoy the benefits of coffee and colonists began to colonize countries for coffee plantation.

Historically Costa Rica did not had a big labour force.Because of this (absence of large labor force) large plantations did not develop in Costa Rica. However, many Latin American countries like brazil and colombia had large plantations. Historically Costa Rican plantations were owned by small landowners, who owns 10 or 15 hectare of land. Income from these small coffee farms is a livelihood for many of the Costa Rican families even now.

Shade-Coffee and Sun Grown Coffee in Costa Rica

Coffee can be planted and grown in two ways. Traditionally coffee is grown under the shade of hardwood or fruit tree species. These are called shade-grown coffee. During the "modernization" era of farming, In order to increase the export revenue, every country pushed for high yield farming mechanisms to increase the quantity of food produced from farmlands or plantations. So many farmers in Costa Rica moved to Sun grown coffee, a hybrid coffee variety, which generates high yield per hectare and grows three times faster than the traditional shade-grown coffee. However, these sun-grown coffee needs a high quantity of fertilizers and has higher costs of farming. In summary "Sun grown" coffee plantations are not sustainable coffee plantations and they are disrupting the ecosystems. Currently, there is a very high percentage of coffee plantations in Costa Rica which are still sun grown. However, the government and other agencies are pushing for sustainable business practices and trying to differentiate the Costa Rican shade-grown coffee with other coffees. While drinking coffee at Dota we could differentiate the uniqueness of the coffee in that region. So we believe Costa Rica will be successful in creating a market for its unique shade-grown coffee.

Costa Rica's Competitive Advantage

Costa Rica's core competency is its ability push sustainable business practice in many areas. The country is been very successful in implementing sustainable business practices in difficult industries like tourism and coffee production. Currently, many of the coffee cooperatives are already using sustainable production practices like using coffee husks instead of firewood and country is pushing farmers to use shade grown coffee thereby reducing the use of fertilizers and keeping the environment safe. So the main competitive advantage Costa Rica has its ability to produce coffee with less water, energy consumption, and greenhouse gas emission. The country is also pushing more sustainable coffee farming and processing methodologies. Costa Rica should also create a framework for the sustainable business practice and agency to rate the sustainable business practice. Then it should push major coffee buyers like kraft, nestle etc and international organizations like UN to promote "sustainable coffee" trading. Currently, very less amount of sustainable coffee is traded globally also companies like Kraft and Nestle have less interest in buying sustainable coffees.

Costa Rica can also try to find unique taste attributes in its coffee and try to market it as a differentiated product. However, the main challenges with this approach are the money and effort needed for this is very high and the risk of failure is also high. But still, the country should put efforts in finding key attributes in taste to differentiate its coffee and try to find if it can make unique coffee and non-coffee products like chocolates etc. Above all the stability of the government is one of the major advantages in Costa Rica. Costa Rica is one of the countries with almost zero political risk. This is country without a military and provided a stable government for last seventy plus years. Many coffee producing countries are facing serious political challenges.So this is a major advantage in doing business in Costa Rica.

Weaknesses of the Costa Rican economy

One of the main issue with Costa Rican coffee production is the regulation in the industry. Innovations are not properly rewarded in a highly regulated industry and regulations will increase the cost of production. This should be a major concern for the "AEQUITAS" as any increase in regulation will result in a decrease in the profit. Another concern for "AEQUITAS" is the overall economy level. Costa Rica is having less 4% growth in the last four to 5 years. Any stagnation in the economy can have negative effects in investing in the country. As the poverty level increases the political risk will also increase and doing business in Costa Rica will be a major challenge. Future availability for human resource might be another challenge for the company. If Costa Rica is not investing or not allocating resources for education, the creation of the skilled people for research and development then AEQUITAS might find it difficult to operate in Costa Rica.Finally if Costa Rica decided not to incentivize for sustainable farming and production practices and force people to use methods to generate just profit then "AEQUITAS" might be facing big challenges in its operation as company will forced to compete in international coffee market and forced to operate in less margin or negative margin. These are the major challenges for the company and most of them are country level or governmental level risks where the company has very less leverage in managing however company could point these to the ministers or other members in the executive branch and try to find a proper solution for this. AEQUITAS Suggestions To The Government Primarily the country should try to find new farming practices so that the cost of coffee bean production can be reduced. Currently the high cost of farming is the major issue faced by majority of the coffee farmers. AEQUITAS should point out the importance of innovation for new farming methods.So that the coffee production cost can be minimized. Additionally, it should work with governments to reduce the regulations in the coffee farming and production.

The company should point out the importance of creating a framework and an organization to evaluate sustainable coffee production. "AEQUITAS" should work with government and other NGOs to create a framework for sustainable coffee production. Then it should ask Costa Rican government to take this to international organizations and use it as a benchmark for sustainable coffee production and use it also as a metric in the international trade. AEQUITAS should also convince the government to invest in innovations around sustainable coffee production. Costa Rica should promote institutions and hubs that could suggest sustainable business practices like techniques to reduce the fertilizers or how to minimize the amount of water or which trees is the best for providing the shades etc.

Another important step Costa Rica should venture is promoting its brand of coffee. It should work with the various organization and marketing agencies to find the unique properties of the Costa Rican coffee and promote the country coffee brand in the international market. Costa Rica should also try to find unique taste attributes in the Costa Rican coffee and try to use these as unique attributes and differentiate Costa Rican coffee in the international market. Having a country brand for a product gives unique pricing possibilities. Finally, a major suggestion for the government is to provide subsidies and provide help for only sustainable business practices in coffee production and farming. Innovations to increase the sustainable practices should also be funded by the government.

Conclusion

Over the 200 years coffee is being produced from Costa Rica. Traditionally the coffee is being grown under the shades of trees. But after the agricultural modernization in late 80's or early 90's majority of the traditional coffee is being replaced by the sun grown coffees. And heavy use of fertilizers damaged the diverse ecology of Costa Rica. Currently, the country is trying to reinvent itself and trying to undo a lot of the mistakes it has done. This will be a right moment for a company like "AEQUITAS" to get in and help the country in achieving the goals. However, there are some risks but if there is a cooperation between the country and its people these risks can be easily mitigated. Sustainable production and farming practices is soon going to be the major trend and investing in a country which values these practices is the perfect opportunity for a company like "AEQUITAS". Doing business in Costa Rica will learning for "AEQUITAS" on sustainable Farming and production techniques. This knowledge will be very valuable and can be used throughout the world soon. So this is a very rare opportunity and "AEQUITAS" should use it for its betterment and betterment of the humanity.