Implemented by

CAPACITY BUILDING TOOLKIT (MODULE 7)

BUSINESS MODEL:
ORGANIC COFFEE
CULTIVATION
Published by
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

Registered offices:
Bonn and Eschborn
Umbrella Programme for Natural Resource Management
A2/18, Safdarjung Enclave
New Delhi 110 029 India
T: +91 11 4949 5353
F : + 91 11 4949 5391
E: info@[Link]
I: [Link]

Responsible
Mohamed El-Khawad
Program Director and Cluster Coordinator
Environment, Climate Change and Biodiversity
Email: [Link]-khawad@[Link]

Rajeev Ahal
Director, Natural Resource Management
Email: [Link]@[Link]

Technical Partners
Intellect Consortium

Content Review
Dr [Link] (BIRD),
Deepak Chamola, Technical Expert, GIZ

Editor
Raj Pratim Das

Design and Layout

Rouge Communications
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Photo credits/GIZ
GIZ is responsible for the content of this publication
On behalf of the
German Federal Ministry for Economic Cooperation and Development (BMZ)

New Delhi, India

October, 2019
 ABOUT THE
MODULE
National Bank for Agriculture and Rural Development (NABARD), Bankers Institute of Rural Development (BIRD)
and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH has come up with a ‘Farmer Producer
Organisation (FPO) Capacity Building Toolkit’. The toolkit
contains the following modules:

1. FPO orientation material

2. FPO capacity assessment tool
3. Training for Trainers (ToT) manual for Board of Directors (BOD)
4.
FPO Massive Open Online Course (MOOC)
5.
Guidebook on FPO business planning
6.
Guidebook on FPO legal compliances
7.
Business models for FPOs
8. Schemes and policy initiatives for supporting FPO
9. Guidebook on common derivative market for FPOs
10. Guidebook on input business planning for FPOs
11. Guidebook on FPO financing for bankers

MODULE 7 ‘Business models for FPO’ presents a compilation of business models of various commodities based on
experience of Umbrella Programme for Natural Resource Management (UPNRM) programme to help FPOs and other
stakeholders in development of business plan, as a reference material.

The module covers challenges with respect to the commodity, project idea, impacts, sustainability and financial
details including cost-economics

This business model is on Organic Coffee.

 CONTENTS
1. BACKGROUND 1

2. CHALLENGES IN CULTIVATION OF ORGANIC COFFEE 3

2.1 Coffee diseases 3
2.2 Climate change 3
2.3 Pest management 3
2.4 Harvesting and post-harvest practices 3
2.5 Supply and demand mismatch 3

3. PROJECT IDEA 4
3.1 Intervention Strategies 4
3.2 Potential for upscaling 5
3.3 Comparison with conventional 5
3.4 Case example UPNRM 5
3.5 Business model with flow chart representation 6

4. IMPACTS AND SUSTAINABILITY 7

4.1 Impacts- Social, Economic and Environmental 7
4.2 Mainstreaming options 8
4.3 Climate resilience or adaptability of the model 8
4.4 Sustainability 8

5. FINANCIAL DETAILS 9
5.1 Scope of financing and subsidy 9
5.2 Cost Economics 10
5.2.1 Cost benefit for farmers 10
5.2.2 Cost benefit for FPO’s 13

6. RECOMMENDATIONS AND WAY FORWARD 16

LIST OF TABLES
Table 1: Size of coffee farms in India (2016-17) 1
Table 2: Coffee Production in India (2017-18) 1
Table 3: Year-wise export of coffee from India 2
Table 4: Cost-benefits for individual farmers engaged in organic coffee cultivation (1acre landholding) 11
Table 5: Economic analysis of organic coffee cultivation in one-acre landholding 12
Table 6: Working capital loan for farmers 13
Table 7: Cost-benefits for FPO engaged in processing and marketing of coffee (150 acres) 13
Table 8: Economic analysis of operations of FPO 15
Table 9: Working capital loan for FPO 15
Table 10: Capital expenditure loan for FPO 15

LIST OF FIGURES
Figure 1: Diagrammatic representation of the proposed business model 6
 CAPACITY BUILDING TOOLKIT (MODULE 7)
iv BUSINESS MODEL:
ORGANIC COFFEE CULTIVATION
01
BACKGROUND
The origin of Coffee is traced to a goat herder name Kaldi in Ethiopia, who is believed to have first discovered the
coffee beans in 7th century AD. Around the 15th century coffee is believed to have made its way into Yemen. The
Yemen port at which coffee beans first arrived was named as Mocha and today Mocha has become synonymous with
coffee.

Coffee reaches India, through a Sufi saint Baba Budan, who during his pilgrimage to Mecca in 1670 AD smuggled
some coffee beans to India and planted coffee on Chandragiri Hills in Chikkamagaluru district of Karnataka.

Today close to 3.5 lakh farmers are engaged in coffee cultivation in India, although a majority of them are small and
marginal farmers having less than 1 ha land.

Table 1: Size of coffee farms in India (2016-17)

State/region Size of landholdings (2016- 17)

<1 ha > 1 ha
Karnataka 76960 2201
Kerala 77370 275
Tamil Nadu 17656 350
Odisha and AP 167370 26
North East 10477 9
349833 2861
Source: Coffee Board, GOI

The total production of coffee in India (2017-18) is estimated to be around 3.15 lakh tonnes. Karnataka (70%) and
Kerala (21%) are the main coffee growing states in India while coffee is also grown in small quantities in Tamil Nadu,
Andhra Pradesh, Odisha and North east.

Table 2: Coffee Production in India (2017-18)

State/Region Coffee Production (MT)

Karnataka 222300
Kerala 65375
Tamil Nadu 17440
Andhra Pradesh 9600
Odisha 740
North Eastern Region 185
Total 315640

Source: Coffee Board, GOI

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 The coffee cultivation, in India, mostly takes place during the Monsoon season that is why it is termed as ‘Indian
Monsoon Coffee’.

As per the estimates around 50% of Indian coffee is exported to Italy, Germany, Russia, Belgium, Turkey and U.S.A.

Table 3: Year-wise export of coffee from India

Year Quantity (MT)

2015-16 317823
2016-17 355537
2017-18 267510
Source: Coffee Board, GOI

Organic Coffee
Organic coffee cultivation is at its nascent stage in India. According to the available data for the year 2008, an area
of only 2600 ha was under organic coffee cultivation with an estimated production of around 1700 MT. Although
organic coffee production is expected to have increased since then but there is a significant scope for expanding
organic coffee cultivation in the country as the conditions here for organic coffee production are far more favourable
than in any other coffee producing country. Some of them are1:
• In many parts of India, coffee is cultivated in fertile jungle soils under a two-tier canopy comprising of
evergreen leguminous and non-leguminous shade trees. Cultivation under trees helps in reducing soil erosion
and improved soil fertility by recycling nutrients in the form of leaf litter and by protecting coffee bushes from
vagaries of changing weather conditions.
• Traditional farming practices such as the use of cattle manure, composting, manual weeding etc., are in vogue
in vast majority of small holdings.
• Horticultural practices followed in Indian coffee plantations are considered as one of the best in the world, in
which emphasis is mainly towards manipulation of microclimate and plant health, so as to reduce excessive
dependence on agro- chemical inputs.

Apart from these natural advantages, the Indian coffee industry is characterised by small holdings. Majority of these
small holdings especially in Idukki zone of Kerala, Bodinayakanur zone of Tamil Nadu and all the tribal holdings in
Andhra Pradesh and the North-Eastern states are basically organic by default.

1
Coffee Board of India

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02
CHALLENGES IN
CULTIVATION OF
ORGANIC COFFEE
The following are some of the major challenges in the cultivation of organic coffee in India:

2.1 Coffee diseases

One of the major issues with coffee cultivation in India is fungal infection which adversely impacts coffee plants.
Prevention of fungal diseases is a major challenge for the farmers as, so far, an effective cure for this has not been
found. Coffee rot is another disease which damages the plantation considerably, particularly in the Karnataka region.

2.2 Climate change

Coffee, according to experts, has a specific preference in terms of rainfall and temperature. Prior to flowering it
prefers a dry period of few weeks that stresses the plant into flowering, subsequently it needs a good soaking to
stimulate actual opening of flowers and then it needs periodic rains to fill the berries. During the flowering stage,
the temperature must be within reasonable limits. However, shift in rainfall patterns, erratic rainfall and rise in
temperatures are believed to be having an adverse impact on coffee plantations.

2.3 Pest management

Coffee cultivation is susceptible to the pest attacks which reduce the yield considerably. Although in conventional
cultivation chemical pesticides are used by farmers but in case of organic coffee cultivation farmers require knowledge
about adequate pest management strategies such as - application of biological agents.

2.4 Harvesting and post harvest practices

There is a need to improve the Package of Practices (POPs) especially related to harvest and post-harvest management
to be applied in coffee. Poor practices adversely impact the quality of coffee. Moreover, there is a need to improve
post-harvest infrastructure such as processing, storage and warehousing.

2.5 Supply and demand mismatch

Coffee sector in the past, has been witnessing supply and demand mismatch related crisis. On several occasions over
the past two-decade or so the production of coffee increased but farmers were not able to find suitable markets and it
became difficult for them to even cover their costs of production. For example, reports indicate that in the Wayanad
district of Kerala alone about 10 estates were closed down, (due to demand and supply mismatch) in 2005 which
affected over 1500 workers. The need is therefore to not only expand coffee markets but also ensure adequate storage
facilities for farmers so that they may be able to store their produce in case of low demand.

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 03
PROJECT
IDEA
This business idea aims to promote organic cotton cultivation and create an enabling system wherein farmers can
access the improved technology, POPs, financial services and leverage their collective strength to enhance incomes.

Since the demand for organic coffee in the domestic as well as international markets is growing thus the farmers
would be able to get premium prices while issues related to impact of climate change on coffee cultivation are also
expected to be minimised.

This project idea promotes a cluster-based approach wherein a Farmer Producer Organisation (FPO) will be formed
and nurtured in order to link the farmer produce to the mainstream market. The FPO would support the farmers in
aggregation, sorting, grading, processing, packaging, quality improvement, branding, sales promotion and marketing.
It would also seek to secure organic premium for the farmers in a bid to enhance their incomes.

3.1 Intervention Strategies

It is being proposed that the interventions in coffee sector must be taken up on 150 acres of land. This would form a
cluster wherein the targeted farmers would be organised into Farmer Interest Groups (FIGs) of coffee cultivators. At
the cluster level FPO would be formed which would assist the farmers in aggregation and in achieving the economies
of scale. Under this broad framework, the following specific interventions are proposed to be implemented:

For farmers groups:

Support may be provided through a local competent NGO or an existing FPOs for the following interventions.
a. Farmer’s mobilisation and sensitisation for the adoption of organic coffee cultivation (grant/subsidy).
b. Training and extension services for the farmers on POPs for organic coffee (grant/ subsidy).
c. Facilitation of organic certification (grant/ subsidy).
d. Facilitate farmers to obtain financial benefits under different promotional schemes of Coffee Board of India
and other schemes of the concerned state and central government.
e. Facilitate farmers to access quality planting material, assess the risks and develop risk management strategy in
pre-harvesting, harvesting and post harvesting areas.
f. Introduce crop insurance in coffee sector (such as ICICI Lombard pilot initiative in Karnataka in coffee crop
insurance).
g. Buy-back of farm produce through the FPO.

The cluster development approach under this model would be helpful in minimising the overhead costs including
administrative, monitoring, certification and capacity development of the farmers/ FIGs.

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For FPOs
a. Farmer mobilisation and sensitisation for the adoption of organic coffee cultivation.
b. Training and extension services for the farmers on POPs for organic cultivation.
c. Facilitation for organic certification and developing a robust internal control and traceability system.
d. Procurement of quality organic seeds for raising nurseries and supply of seeds to farmers.
e. Channelising credit to the members of FIGs for cultivation (based on the need for credit). The FPO may charge
a small percentage of interest in order to recover facilitation costs. Linkages may be developed with financial
institutions for providing loans to FIGs and also loan to the FPO.
f. Promote crop insurance and ensure farmers to go for crop insurance.
g. Development of systems for aggregation and supply chain management.
h. Creation of post-harvest infrastructure namely; processing unit, storage and related equipment/ machinery etc.
i. Processing, branding and marketing of organic coffee.
j. Convergence with various enabling schemes.

The funds can either flow directly to the FPO or through an NGO, which will have the overall responsibility of
achieving the project objectives.

3.2 Potential for upscaling

A couple of decades ago, the annual per capita average consumption of coffee in India was less than a quarter-pound of
coffee compared to 9 pounds average annual per capita consumption in USA. However, according to the Coffee Board
of India, the annual per capita consumption of coffee has tripled during the last decades. The accelerated growth can be
attributed to the two successful retail business chains that sell mass-market Indian coffee: Cafe Coffee Day, a Bangalore-
based company with more than 1,600 outlets nationwide; and Starbucks, which arrived in 2012 and brews its espresso
drinks exclusively with coffee from Indian farms owned by its corporate partner, the Tata Coffee conglomerate.

In addition to the growing domestic demand for coffee, the demand for organic products, including coffee, is also
growing in national and international markets. However, currently organic coffee cultivation is being done on a limited
scale and hence there are significant possibilities for up-scaling production of organic coffee.

3.3 Comparison with conventional

As compared to conventional cultivation of coffee, organic coffee cultivation helps in promoting biodiversity and
reduces environmental pollution. At the same time organic cultivation has the potential to reduce the input costs for
farmers. In fact, battling with the impacts of climate change, coffee producers have the option to adopt organic farming
in order to mitigate the impacts of climate change to some extent.

Moreover, organic coffee fetches higher prices for the farmers which results in higher economic gains. In fact, online
survey of prices of conventional and organic coffee revealed that retail prices of organic coffee powder were nearly 25%
to 30% higher than conventional coffee. As far a wholesale prices were concerned, it was observed that wholesale prices
of organic coffee were around 10% to 15% higher.

3.4 Case example Umbrella Programme for Natural Resource

Management (UPNRM)
The project idea is based upon a model developed by Wayanad Social Service Society (WSSS) which is based in
Wayanad, Kerala. WSSS implemented organic coffee cultivation programme with the support of Deutsche Gesellschaft
für Internationale Zusammenarbeit (GIZ) GmbH and National Bank for Agriculture and Rural Development

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 (NABARD) under UPNRM. This model has been quite successful in terms of promoting organic cultivation of two
prominent cash crops, pepper and coffee which have been providing significant economic benefits to the farmers.

WSSS with its partner organisation Bio-Win (a section 8 NPO) has developed a strong value chain in organic sector.
It has established state of the art facilities for processing, packaging and value addition. The key highlights of the
model are as follows.
• Approximately 10,000 households across 40 revenue villages have been engaged in cultivation of coffee and
pepper in around 6000 ha area.
• Organic certification has been secured for approximately 7261 certified organic farmers covering over 4940 ha
land.
• A Section 8 company has been set up to trade organic products and two community-based organisations
(CBOs)/FPOs have been formed to provide extension, aggregation and supply chain management services at
the local level.
• Linkages with prominent research, technical, government and private sector institutions have been established
in order to strengthen the production base and build the access of farmers over the various services.
• An online portal (Vikaspedia) of GOI has been introduced among the farmers in order to educate and
dominate the information among them.
• Fairtrade certification/linkage has been developed for farmers.

3.5 Business model with flow chart representation

The following figures represents the business model in coffee sectors for the FPOs to be promoted.

Figure 1: Diagrammatic representation of the proposed business model

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04
IMPACTS AND
SUSTAINABILITY
4.1 Impacts – Social, Economic and Environmental
Social impacts
a. Vibrant economic institutions developed in the form of FIGs in the villages to address issues that relate to the
economic, social and environmental well-being of the habitants.
b. Awareness, education and skill development of the farmers in coffee value chain.
c. Enhanced scope for women’s participation in coffee value chain and improvement in women’s status in the
society due to their increase engagement in economic activities and exposure to diverse ideas.
d. Enhanced leadership among the small and marginalised farmers due to their role in business decision making,
management of production, infrastructure and supply chain.

Economic impacts
a. Increase in income of the farmers (estimated-10-15%) due to improved cultivation practices, quality
improvement, sorting, grading and moreover due to organic intervention in the coffee sector.
b. Reduced cost of production of coffee in the long run (no purchase of chemical fertilisers, pesticides,
insecticides etc. with farm yard manure being prepared by farmers themselves. Reduced number of spraying
saves labour costs).
c. Improved economic security for the farmers by integrating them into the market directly through FPO. This
will make them free from the exploitative intermediary-based marketing system.
d. Capacity buildings of the farmers/ FIGs on risks assessment and mitigation in all the stages of coffee value
chain for assuring economic security.

Environmental Impacts
a. Reduction of soil, water and air pollution because of use of organic manures, FYM and organic pesticides and
IPM.
b. Organic soils retain more water.
c. Increase in biodiversity – agri-biodiversity, micro-organisms etc.
d. Eco-balance between pests and beneficial insecticides.
e. Improved soil fertility.

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 4.2 Mainstreaming Options
The proposed model is suitable for enhancing incomes of the small coffee growers in the existing coffee belt i.e.
Karnataka, Kerala and Tamil Nadu. At the same time, it could be replicated in areas where coffee cultivation is
currently on a limited scale i.e. Andhra Pradesh, Odisha and the North-Eastern region.

The model can be promoted/ replicated elsewhere jointly with Coffee Board of India, NABARD, Banks, State
Horticulture Dept. and financial institutions.

As part of replication, interested groups/ stakeholders may be taken to Wayanad at WSSS for the exposure, learning
visits and accordingly the model may be replicated with necessary customization to the local context.

4.3 Climate resilience or adaptability of the model

Climate change is having an adverse impact on coffee production across the world. According to a report by The
Climate Institute2 rising temperatures are changing rainfall patterns are believed to be affecting coffee yields and
quality in coffee growing regions while increasing pests and diseases. The report mentions that climate change is
projected to reduce global area suitable for coffee production by as much as 50% by 2050.

Indian coffee too has been facing issues arising out of shift in rainfall patterns, erratic rainfall and rise in
temperatures, which are having an adverse impact on coffee plantations. Farmers are reporting decline in yields while
the quality of coffee beans is also reportedly being affected.

Organic cultivation of coffee can help in building resilience of coffee farms to the changing climate. In the long term,
organic cultivation can enhance the capacities of farms to better adapt to moisture and temperature stress while also
building resilience to diseases and insects. It has the potential to improve the yields and also improve the quality of
coffee.

4.4 Sustainability
The proposed model is based on the experience gained in Wayanad, Kerala, and it seeks to address the various issues
relating to the sustainability of the intervention. It is strongly felt that with the initial financial and handholding
support – comprising of FIGs and FPO – this model would be able to achieve sustainability after a period of 2 to 3
years. The major factors that are expected to contribute towards sustaining this model are:
1. Facilitating agency to provide initial facilitation, startup and handholding support.
2. Capacity building of FIGs and FPOs in governance, business planning and financial management including
Disaster Risk Reduction (DRR) in the coffee sector.
3. FIGs to be linked with banks and bank loans provided to farmers.
4. Convergence with the ongoing government schemes to be achieved.
5. The economics of this model indicate moderate to high returns from the farmers and the FPO.
6. This model factors the cultivation of one crop only, however farmers would be able to do intercropping which
would result in higher economic gains for the farmers.

2
The Climate Institute (2016). A brewing storm: The climate change risks to coffee.

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05
FINANCIAL
DETAILS
5.1 Scope of financing and subsidy
The members of FIGs (farmers) would require loan– for purchasing seeds/planting materials of coffee. For cultivation
of coffee in one-acre land, a farmer would require a loan of INR 78,480 spread over a period of 4 years. Although
the farmer may meet their working capital requirement partly from schemes of Coffee Board of India and other
government sources but under the present model the entire working capital requirement has been projected through
bank loans. The facilitating agency and/or the FPO would assist the farmers in obtaining loans.

The FPO is expected to require capital assistance (for equipment) to the tune of INR 38.60 lakhs and working
capital assistance to the tune of INR 300 lakhs. Working capital requirement would be met primarily through loan
from NABARD and other banks while capital costs would be met partially through loans and partially through grant
assistance.

The facilitating agency/ FPOs may look at the following schemes of the Coffee Board to meet out the cost of FIGs /
FPOs

Integrated Coffee Development Project: Following support is available for coffee growers in traditional coffee
growing areas:
• Development support for coffee in traditional areas: Small farmers having up to 10 ha holdings are eligible
to receive subsidy up to 40% of unit cost (unit cost for Arabica is INR 2.75 lakh and for Robusta INR 2.00
lakh) for plantations of high yielding, disease tolerant coffee varieties. SC/ST households having up to 4 ha
holdings are eligible for an additional support of 10% of the unit cost.
• Water augmentation: Individual growers, joint ownerships holding(s), family members are eligible for
subsidy up to 10 ha for (a) Water harvesting structures like water storage tank or open well or ring well (b)
Procurement of irrigation equipment (sprinkler / drip). Subsidy is available up to 40% of unit cost subject to
a ceiling of INR 2.50 lakhs per beneficiary. ST/ SC households with holding size of up to 4 ha are eligible for
an additional support of 10% of the unit cost, subject to a ceiling of INR 2.50 lakhs per beneficiary.
• Eco-certification of coffee. Individual growers having up to 10 ha area and groups of small growers
(SHGs, collectives) who obtain certification for their plantations are eligible for subsidy up to 50% of the
certification cost subject to a maximum of INR 50,000/- per individual grower/grower groups (in case of
organic certification, spread over a period of 3 years or the conversion period whichever is less; in case of other
certificates, one year, during the MTF). SC/ ST households having holdings upto 4 ha are eligible for an
additional support of 10% of the certification cost subject to a maximum of INR 55,000/- per grower.

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 • Support to Small Growers’ Collectives/SHGs/Cooperatives for coffee marketing: All Small Growers’
Collectives/Self Help Groups (SHGS) / Co-operatives in traditional coffee growing states are eligible to receive
financial assistance up to INR 4 per kg subject to the condition that coffee marketing is taken up in the name
of small growers’ SHGs/ Collectives and or Cooperative.

It is to be noted that subsidy for cultivators of coffee in non-traditional areas (NTA) under Coffee Development
Program (CDP) is also available under this scheme’s various components.

Paramparagat Krishi Vikas Yojana (PKVY): Under PKVY farmers taking up organic farming (minimum group
size of 50 farmers) are provided grant assistance of INR 20,000 per acre spread over three-year period. Farmers could
utilise these funds for purchasing seed, crop harvesting and transportation of produce.

Small Farmers’ Agribusiness Consortium (SFAC) Scheme: SFAC supports FPOs by extending the loan guarantee
and equity capital support schemes: The following two schemes of SFAC would be helpful for the FPOs to leverage
the loan from banks:
a. Loan/ equity guarantee cover scheme: Loans to Producer Organisations (POs)/FPOs/FPCs under credit
guarantee cover. Under this scheme FPOs can get term loan, working capital loan and or both. However, to
be eligible to get the loan, the FPO must be 1 to 2 years old having audited balance sheet for at least one year
and a minimum share capital of INR 3 lakhs. The rate of interest is charged as per the NABARD refinancing
rate. The loan is given up to 6 times of the net worth of FPOs or INR 1 crore whichever is less.
b. Equity Grant Fund Support to FPCs: The Equity Grant Fund enables eligible FPCs to receive a grant equivalent
in amount to the equity contribution of their shareholder in the FPC, thus enhancing the overall capital base
of the FPC. The Scheme shall address nascent and emerging FPCs, which have paid up capital not exceeding
INR 30 lakh as on the date of application.

NABKISAN’s Support to newly formed FPOs: There is provision for the loans to emerging/ nascent POs which
are not in a position to provide collaterals. Funding is provided to such FPOs up to INR 50 lakh in the form of loan
which depend purely on the merits and prospects of their business plan.

Ministry of Food Processing Industries: Financial assistance is provided for setting up of primary processing
centres/collection centres at farm gate and modern retail outlets at the front end upto a maximum of INR 10 crores
per project. The Scheme envisages grants-in-aid of upto 35% to 50% subject to proportionate utilisation of bank
loan and promoter’s equity.

Mahatma Gandhi National Rural Employment Guarantees Act (MGNREGA): In case of unculturable wastelands
and erstwhile fallow lands are proposed to be used for cultivation then under ‘land development works’ component
of MGNREGA labour cost for bunding and land levelling are provided under this scheme.

5.2 Cost Economics

The proposed business model provides estimates of cost-benefits at two levels i.e. at the level of individual farmer and
at the level of the FPO for organic coffee cultivation, processing and marketing.

5.2.1 Cost-benefit for farmers3

The following tables provide details of the expected cost of cultivation and the expected revenue for individual
farmers engaged in cultivation of organic coffee on one-acre land:

3
It must be mentioned that the costing and yield taken under this model are based on experiences from Wayanad. Therefore, the cost-benefit
estimates would be valid under similar geographic conditions. However, costing and yield may show slight variations from region to region.

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 Table 4: Cost-benefits for individual farmers engaged in organic coffee cultivation (1 acre landholding)

Unit Cost Total Cost (INR)

[Link] Particulars Unit Quantity (INR) Year 1 Year 2 Year 3 Year 4 Year 5
A Inputs/Practices                
A.1 Sowing Practices                
1 Cost of raising seedlings Nos 300 15 4500 0 0 0 0
(per Acre)
  Total (A.1)       4500 0 0 0 0
A.2 Main Field cultivation                
2 Land preparation Person 6 250 1500 0 0 0 0
days
3 Manure / compost Kg 300 10 3000 3150 3308 3473 3647
4 Plantation of coffee Person 10 250 2500 0 0 0 0
days
5 Labour cost in agricultural Person 15 250 3750 3938 4134 0 0
operations (weeding etc.) days
6 Bio-fertilizers / Bio agents Kg 1500 10 15000 15750 10000 10500 11025
  Total (A.2)       25750 22838 17442 13973 14672
A.3 Harvest and post-harvest                
costs
7 Labour cost for harvesting Person 8 250       2000 2100
days
8 Primary drying and grading Person 3 250       750 788
days
9 Packaging and transportation Per Qtl 12 250       3000 3150
cost
  Total (A.3)       0 0 0 5750 6038
A.4 Other costs                
10 Crop Insurance (per acre) Per   1700 1700 1700 1700 1700 1700
annum
11 Interest on working capital       2904 5724 8212 9039 7723
  Total (A.4)       4604 7424 9912 10739 9423
  Cost of Cultivation       34854 30262 27354 30461 30132
(A1+A.2+A.3+A4)
A.4 Total Cultivation Cost                
12 Total yearly cost of       34854 30262 27354 30461 30132
cultivation
13 Total cumulative cost of       34854 65116 92470 122932 153064
cultivation
B Other information                
14 Yield per Acre (4th year Kg 1350         1350 1485
plantation)
15 Selling prices (currently Rs. INR 80         93 97
80; assuming 5% inflation
per year)
B.1 Income of Coffee Farmers        
17 Total Cultivation cost             122932 30132
18 Net Return after 5 years INR             116531
B.1.1 Annualised net return per acre               23306
(over 5 years)

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 Assumptions:
• The cost of cultivation may be sourced from the ongoing schemes of the Government, including those of the
Coffee Board of India and Paramparagat Krishi Vikas Yojana.
• Since the farmers would get first harvest at the end of fourth year, they would therefore require loans to meet
the cultivation costs during the first four years. The FPO could arrange loan from the bank for the farmers.
• Since this model is based upon organic cultivation therefore organic premium has been factored in the pricing
while every year 5% price inflation has been factored in.
• The above assumption does not factor in drip irrigation system. In case drip irrigation is factored in then the
yields are expected to increase by about 15 to 20%.
• The yield in fifth year would increase by 10% while it would increase by further 10% in the sixth year. The
maximum expected yield from one acre is 1600 kg.
• Working capital requirement has been calculated on all material costs (excluding labour costs).

Economic analysis

It is evident from the table below that under the proposed business model the farmers are able to get a cumulative
return of more than INR 1 lakhs over five years. While the gross returns are expected to be around INR 1.25 lakhs to
INR 1.44 at the end of 4th and 5th year respectively. The Benefit Cost ratio for an individual farmer is calculated to
be 1.38.

Table 5: Economic analysis of organic coffee cultivation in one-acre landholding

Amount in INR
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total
Capital cost 0 0 0 0
Recurring cost 34854 30262 27354 30461 30132
Total cost 34854 30262 27354 30461 30132 153064
Total benefits 125550 144045 269595
Net benefits -34854 -30262 -27354 95089 113913 116531

Net present worth of cost @15% 103600

Net present worth of benefits 143405
@15%
Benefit Cost Ratio 1.38

LOANS

It is envisaged that organic coffee cultivators would require loan to meet their cultivation costs during the first four
years. However, at the end of fourth year the farmers would be able to sell their first crop and earn revenues and
subsequently they would not require loans to meet the cultivation costs. The repayment of loan is projected from the
4th year onwards.

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12 BUSINESS MODEL:
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 Table 6: Working capital loan for farmers

INR in Lakhs
Working capital loan Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y 10
Yearly Working Capital 24200 20600 15008 18673 0 0 0 0 0 0
Requirement
Repayment 0 0 0 20000 20000 20000 20000 20000 20000 6367
Interest on net working 2904 5724 8212 9039 7723 6250 4600 2752 682 0
capital Loan (Diminishing)
@ 12% per annum
Total Loan outstanding 27104 53428 76648 84360 72083 58333 42933 25685 6367 0

5.2.2 Cost-benefit for FPOs

The estimated cost-benefit for FPOs is discussed below:

Table 7: Cost-benefits for FPO engaged in processing and marketing of coffee (150 acres)

Amount in INR lakhs

 [Link] Particulars Unit Quantity Cost (Rs.) Year 1 Year 2 Year 3 Year 4 Year 5
A.1 Capital Cost                
1.1 Storage (transit storage) cum Sq. ft. 1800 700 12.60 0 0 0 0
office
1.2 Office equipment (Chairs, Lumpsum 1 100000 1.00 0 0 0 0
table, shelf, computer, printer
etc.)
1.3 Coffee processing unit- Dryer, Nos 1 1000000 10.00 0 0 0 0
coffee peeler, polisher,
roasting machine, grinding
machine, packaging machine,
weight machines and sealing
machine etc.)
1.4 Purchase of vehicle for Nos 1 1500000 15.00 0 0 0 0
transportation
  Total capital cost       38.60 0 0 0 0
A.2 Recurring cost       0 0 0 0 0
2.1 Mobilisation of farmers, training Acre 300 1000 3.00 3.15 3.31 0.00 0.00
and technical guidance or
organic farming (per year for 3
years)
2.2 Capacity building of farmers in Acre 300 3500 10.50 11.03 11.58 0 0
POPs, primary processing etc
2.3 Certification cost (including Acre 300 1000 3.00 3.15 3.31 3.47 3.65
overheads)
2.4 Procurement of coffee berries Quintals 2400 9300 223.20 234.36 246.08 258.38 271.30
from the farmers (16 quintal
from one acre; total 150 acres)
2.5 Operational and maintenance Quintals 2400 1000 24 25.20 26.46 27.78 29.17
expenses of processing unit

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BUSINESS MODEL: 13
ORGANIC COFFEE CULTIVATION
 Amount in INR lakhs
 [Link] Particulars Unit Quantity Cost (Rs.) Year 1 Year 2 Year 3 Year 4 Year 5
2.6 Packing and transportation Per 720 250 1.80 1.89 1.98 2.08 2.19
expenses quintal
2.7 Staff, administration, travel, Month 12 180000 21.60 22.68 23.81 25.00 26.25
coordination, marketing etc.
2.8 Interest on loan for working Half     18.00 18.00 18.00 18.00 18.00
capital (12%) yearly
2.9 Interest on loan for capital Per     4.63 4.29 3.90 3.47 2.99
cost (12%) annum
  Total recurring cost 309.73 323.74 338.43 338.20 353.55
  Total cost - capital and recurring (A1+A2) 348.33 323.74 338.43 338.20 353.55
B Income/ Benefits                
3.1 Sale of Coffee Quintals 720 55000 396.00 415.80 436.59 458.42 481.34
  Net returns 47.67 92.06 98.16 120.22 127.79

Assumptions:

In the above analysis the following assumptions have been made:

• The above analysis assumes that the FPO is promoting cultivation of organic coffee with about 150 to 300
farmers cultivating an aggregated area of 150 acres.
• Estimating a production of 16 quintals of coffee beans per acre a total of 2400 quintals coffee beans would be
procured by the FPO.
• Coffee beans would be dried at the FPO level with around 70% weight loss upon processing.
• The cost of cultivation/conversion to organic coffee farming for the farmers will be sourced from different
schemes of the Government including those of Coffee Board of India and Paramparagat Krishi Vikas Yojana.
• The FPO would assist the farmers in obtaining organic certification.
• The storage infrastructure will be made of low-cost materials.
• Loan will be obtained for INR 3.00 crores during the first as working capital for procurement of coffee from
the farmers. This amount for procurement will be taken on loan for about 6 months each harvesting season.
• A loan of INR 0.38 crores would be obtained for meeting capital costs.
• An increment of 5% each year for price escalation in the market value of coffee has been factored in.
• An increment of 5% each year for price escalation in the purchase price of coffee beans from the farmers has
been factored in.
• An increase of 5% each year in the cost of processing as well as administrative costs has been factored.
• The staff of FPO will coordinate the entire business operation including monitoring of conversion of
conventional to organic farming.

Economic Analysis

The economic analysis seems to suggest that from the first year of operation onwards the FPO would gain sizeable
revenues (around INR 86 lakhs excluding the capital costs) which are expected to increase over the years (over INR
100 lakhs in 5th year). The Benefit Cost ratio is calculated to be 1.24 which is very good and which indicates that
this business model is viable.

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14 BUSINESS MODEL:
ORGANIC COFFEE CULTIVATION
 Table 8: Economic analysis of operations of FPO

Amount in INR Lakhs

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total
Capital cost 38.60 0 0 0 0
Recurring cost 310 324 338 338 354
Total cost 348 324 338 338 354 1702
Total benefits 396 416 437 458 481 1376
Net benefits 48 92 98 58 128 423

Net present worth of cost @15% 1140

Net present worth of benefits @15% 1412
Benefit Cost Ratio 1.24

LOANS

It is envisaged that for this business model the FPO would require a loan of INR 38.6 lakhs for capital expenditure
and a loan of INR 300 lakhs for meeting the working capital requirements for procurement of coffee from farmers.
Working capital would be required for 6 months each year. The interest payable on working capital loans and on the
loan for capital cost have been included in the overall cost economics of FPO.

Table 9: Working capital loan for FPO

INR in Lakhs
Working Capital Loan Year 1 Year 2 Year 3 Year 4 Year 5
Yearly Working Capital 300 300 300 300 300
Requirement
Repayment 300 300 300 300 300
Interest on net working 18 18 18 18 18
capital Loan (Diminishing)
@ 12% per annum

As far as loan for capital expenditure is concerned, its repayment would be initiated from second year onwards and it
is expected to be repaid over a period of 10 years.

Table 10: Capital expenditure loan for FPO

Capital expenditure INR in Lakhs

loan Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y 10
Capital expenditure 38.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Repayment 0.00 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 3.72
Interest on capital 4.63 4.29 3.90 3.47 2.99 2.45 1.84 1.16 0.40 0.00
loan (Diminishing)
@ 12% per annum
Total loan 43.23 40.02 36.42 32.39 27.88 22.83 17.16 10.82 3.72 0.00
outstanding

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BUSINESS MODEL: 15
ORGANIC COFFEE CULTIVATION
 06
RECOMMENDATIONS
AND WAY FORWARD
The proposed business model for organic coffee shows economic viability for the farmers as well as profitability for
the FPO. At the farmer level the production estimates per acre have been taken on the conservative side while the
costs of cultivation have been taken on the higher side. It is expected that the actual revenues for the farmers might
be higher that the projected. Moreover, the value of financial support through various government programmes has
not been included in the financial calculations.

Similarly, at the FPO level the actual costs of operation might turn out to be less than that is projected in this model,
resulting in higher gains for the FPO. However, it would be critical for the FPO to ensure that adequate quantities of
coffee beans are procured from the farmers.

Support of financial institutions for obtaining loans for the farmers as well as for the FPO would be critical for
this business model. It is therefore important to publicize this model with financial institutions so that they get an
opportunity to analyse this business model and, if found suitable, they may support such a model. At the same time
this model needs to be communicated widely with NGOs who may facilitate the implementation of this model
through the support of financial institutions.

NABARD may consider providing assistance to farmers/FPOs/facilitating agencies for cultivation of organic coffee.

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16 BUSINESS MODEL:
ORGANIC COFFEE CULTIVATION
 Deutsche Gesellschaft für Internationale
Zusammenarbeit (GIZ) GmbH

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New Delhi-110029 India

T: +91-11-494953535
E: nrm@[Link]
[Link]/India

CAPACITY BUILDING TOOLKIT (MODULE 7)

BUSINESS MODEL:
ORGANIC COFFEE CULTIVATION