SCM 463_ASU_ASSIGNMENT_2024_DESIGN OF A CONCEPTUAL MODEL OF CONTRACT FARMING FOR COFFEE TREE REPLANTING INVESTMENT

DESIGN OF A CONCEPTUAL MODEL OF CONTRACT FARMING FOR

COFFEE TREE REPLANTING INVESTMENT

Introduction:

Indonesia as one of the largest coffee producers in Asia, contributes around 8% of the

world's coffee production annually, with the main market being the European Union in

addition to other developed countries such as the United States and Japan (BPS 2022).

Participation in the Global Value Chain (GVC) of coffee contributes 2.1% to the GDP of the

plantation sector, amounting to 11.75 billion out of 560.2 billion rupiah in 2020 (Suwali et al.

2022), employment and a source of income for more than 1.3 million rural farming

households (ICO 2019). 92% of coffee production comes from smallholders and cooperatives

(Gumulya and Helmi 2017). Total coffee production is divided into 534 thousand tons for

robusta coffee and 194 tons (arabica coffee). The government has planned to increase coffee

production as a superior commodity. Currently, Indonesia is able to export 60% of its coffee

production, while the domestic coffee industry can absorb 40% of the total production.

Smallholder coffee plantations have a plantation area of 1.25 million hectares or around 98%

of the total national coffee area, with production of around 99.3% of the total national coffee

production of 780 thousand tons (BPS 2022).

The average productivity of coffee in Indonesia on 1.25 million ha of land, is around

0.8 tons/ha, lower than in Vietnam. The production area of about 641.7 thousand ha in

Vietnam has a productivity level of 2.7 tons/ha. Indonesia's large imports of green beans and

imports of instant coffee by the industry amounting to 100 thousand tons, show the weakness

of production cost competitiveness when compared to other countries. Rejuvenation efforts

undertaken in 2012-2020 in Brazil, Uganda, Nicaragua, Vietnam, and Colombia, seek to

increase production per ha, to improve competitiveness. Coffee plantation rejuvenation is

currently being carried out in the world's coffee-producing countries, in order to efficiently

produce coffee commodities. This effort is carried out with various models and varying

degrees of success. Coffee plantation rejuvenation in Indonesia depends on the smallholder

plantation economy, so Indonesia needs to find a model that suits the conditions and

demographics of Indonesian farmers. 80% of coffee production in Indonesia is obtained in

the Sumatra region with the majority of green beans from Lampung and Bengkulu, mostly

lowland robusta types.

Lampung has a coffee industry ecosystem of farmer plantations, international cargo

ports, exporters and traders, and roasters. This region is a stagnant coffee production area

throughout 2017-2021 (Directorate General of Plantation 2018, and BPS 2022). The

stagnation indicates a lack of investment interest in coffee trees or a lack of maintenance of

coffee trees during non-harvest periods (Puslitkoka 2016). Farmers do not plant new trees on

available land or rejuvenate coffee plantations despite the declining productivity of 30-year-

old trees (Rosanti 2020, Tran 2021). In contrast, replanting robusta coffee with superior or

certified seeds can produce 2-3 tons/ha of productivity (Hulupi 2016). Rosanti (2020), in her

research on coffee farming households, found that wealthy farmers have started to replant old

coffee trees. The majority of farmers, who only own 1-2 ha of land, usually lack the capital to

r e pl a n t . Investment in replanting or Coffee tree replanting is rarely done by farmers when

coffee prices are low. This is because replanting reduces the number of coffee trees that are

the main source of income. But when coffee prices are high, the potential income disappears.

The reduction in the number of coffee trees causes farmers to lose three years of income

waiting for new coffee trees to harvest (Rosanti 2020).

Indonesian coffee farmers focus on cultivation and limited post-harvest activities. After

the coffee beans are sun-dried, farmers will sell them to collectors at the village level, and the

collectors will consolidate the goods and arrange delivery/supply to customers/traders. These

traders will supply to exporters, forming a domestic supply network from farmers that leads

to exporters (Nasution 2023). Each exporter has set suppliers or collectors of their choice so

that the presence of middlemen can form an almost exclusive supply chain, and exporters

open up Indonesian percopian as part of the global value chain (Suprehatin 2023). Exporters

will either sell to roasters, domestic or overseas, or sell to trading houses that will in turn sell

the coffee to international roasters. International trading houses have Indonesian branch

offices that export themselves, accounting for 50% of Indonesia's export transactions, in

addition to their international offices' transactions from Indonesian exporters. Export

transactions absorb 60%-70% of Indonesia's coffee production, channeling Indonesia's output

to the global market through international roasters' products.

The financial investment ratio causes roasters not to invest vertically in agriculture

(Sanya 2015). To fulfill their needs, roasters generally choose to purchase coffee instead of

agriculture backward integration. As an alternative solution between owning their own farms

or procurement, companies engage in contract farming (Prowse 2012). Contract farming is a

cooperative agreement between a farmer and a processing or marketing company to produce

agricultural products at a price agreed upon by both parties (Eaton and Shepherd 2001).

Contract farming is seen as a potential solution to overcome agricultural production

constraints of limited farmer resources and land ownership constraints by companies, which

then developed various models depending on the level of coordination and stakeholder

involvement. In Indonesia, various models of contract farming have been recognized, such as

KSO (land rent in advance and wages to farmers), harvest and payment (credit for inputs to

the crop), subcontract (contract for purchase), inti plasma (inputs and techniques to be

adhered to by farmers), and dependency on the company (Patrick 2004). Contract farming

can benefit companies without land resources, as well as farmers with limited financial

resources, in achieving value and risk jointly, while considering financial returns on labor and

assets, farm households, social capital, and others.

Coffee farmers receive about 84%-94% of the price paid by exporters (Listyati et al.

2017; Neilson 2015; Aklimawati 2015). The ratio of farm gate price to the price paid by

exporters is considered efficient. Meanwhile, Suprehatin (2023) highlighted the equalization

of added value in GVC actors after goods are exported, namely the uneven value distribution

in the coffee global value chain, so that there is a concentration of income in coffee-

consuming countries or countries that do not produce coffee importers, and there are value-

added imbalances among GVC actors in each country of origin. Increasing product value in

GVCs is difficult to develop in developing countries, as the role of local actors is hampered

by market knowledge, market strategies, and technology (Triennekens et al. 2011). The

development of coffee smallholder plantation businesses as part of the GVC system also

depends on the local ecosystem in terms of human resources, access to finance,

entrepreneurial culture, government leadership, infrastructure, market access (Isenberg 2011),

which allows local farmers to improve or develop. These points illustrate the systemic

challenges of coffee farm business development to improve sustainable welfare.

Efforts to improve coffee livelihoods and production have been made by multinational

companies through contract farming (Rosanti 2020), Puslitkoka through the Metromed

arrangement of exporters and farmers (Puslitkoka 2016), and IDH through organizing

industry players (pre-competitive collaboration) to train 500 thousand active farmers (IDH

2014). The existence of international trading houses with better capital and global logistics

gives hope of improving farmers' livelihoods by providing better prices, more market access,

and more choice, in a market previously dominated by local exporters (Puslitkoka 2016).

55% of the 1.2 million coffee farmers expect their families to continue the coffee plantation

business (Tran 2021), which requires rejuvenation to provide better livelihoods. Increased

production in Indonesian plantations is feasible given that even Vietnamese farmers, 62%,

own land in the range of 1-2 ha (Nguyen 2019).

This research received input from the Kopista community advisor on updating the old

coffee tree maintenance method to achieve farm productivity of 2 tons/ha/2000 trees and

replanting 4000 trees, which is similar to the method applied in Vietnam or Brazil. The

Kopista group has a different planting method from that used on Lampung coffee farms:

fertilizing, pruning, no shade and no intercropping. Contrary to the old adage of many

branches, Kopista's pruning method removes low-productivity branches to optimize nutrients

for potential branches. The existence of different performance in the form of production

target discipline and coffee farm agribusiness pattern, distinguishes Kopista from farmer

group assistance. The "min2ton" program is implemented on a community coaching basis

regardless of farmer group membership. Relying on evidence of the success of the Kopista

method rather than waiting for justification of recommendations, farmers gathered in the

Kopista community develop by imitating what has been successfully done by local successful

farmer role models or fellow community farmers. There is some data attached to this study

obtained from the Kopista group on maintenance and replanting methods, investment

calculations and annual costs of the Kopista method. The "min2ton" program illustrates the

independent success of Kopista's young farmers in cultivating the same 1 ha farm, which can

produce a minimum of 2 tonnes of green bean equivalent (GBE) coffee, higher than

Lampung's current average productivity of 0.6 tonnes GBE/ 2.5 tonnes of coffee cherries.

2.1 Theoretical Foundation

2.1.1 Transaction cost theory

Transaction cost theory illustrates that each party to the transaction has an interest for

itself, so that every transaction through the market mechanism has transaction costs (Coase

1988). This theory explains the comparison of activities carried out in a company and in a

market mechanism. Nobel Laureates Coase and Williamson studied that the existence of a

firm is due to the costs in transactions between two parties, compared to when all activities

are carried out in a hierarchy managed by the company. This cost is then called transaction

cost, which then changes with technology, which allows firms to remain small due to more

efficient external activities.

Williamson in Rehber (2007) says that transactions to governance structures that

change from classical contracts to integrated governance (vertical integration). Williamson

also considers the main purpose of vertical integration to be saving transaction costs, and

identifies two types of transaction costs, namely ex ante and ex post. Ex ante can be said

before the resolution of uncertainty, the parties agree to a contract to trade some goods and

create a special investment relationship, ex post can be said after the resolution of uncertainty,

each party must make decisions about how to handle scenarios that are not specified in the

contract. According to Milgrom and Roberts (1992), transaction costs can also be separated

into two categories: coordination and motivation costs. Coordination costs are the costs of

monitoring the environment, planning and bargaining to decide what needs to be done (pre-

contract, ex ante costs). Whereas motivation costs are the costs of measuring performance,

providing incentives, and enforcing agreements to ensure that people follow orders, honor

commitments, and keep agreements (post-contract costs, ex post).

2.1.2. Contract Design Theory

Contract Design Theory positions the right contract design to regulate governance in an

ecosystem where parties can interact according to mutual agreements to achieve the

objectives of the transaction. If the choice of strategy relies on cost advantages, then the

application of transaction cost economics needs to be implemented together throughout the

supply chain. Agreements can bind all related parties to continue to fulfill their rights and

obligations for a common goal. Actors in the supply chain are prone to the risk of

opportunistic behavior, but can carry out joint investment, carry out joint monitoring, and

regulate rights and obligations through contracts (Triennekens 2011). Transactions between

related parties are kept efficient and can be carried out using the applicable contract design.

The weaknesses of contract design related to binding counterparty obligations

(Besanko et al, 2013) are the existence of bounded rationality (limitations about the content

of complex contracts), asymmetry of information (unequal knowledge of the contractor), and

the lack of knowledge of the contractor (Besanko et al, 2013) parties to openness in court), and

measurement of performance (difficulty in determining measures of contract fulfillment). A complete

contract has high transaction costs and enforcement costs (Scott 2005), where all possible scenarios

are included in the contract and the parties include safeguards to eliminate fraud or potential

inefficiencies. The frequent use of the terms "good faith" or "best efforts" in common law contracts is

actually a difficult thing to quantify and contract for. Incomplete investment contracts, as studied by

Nobel Laureates Hart (2017) and Holmstrom, lead to potential problems of investment decline,

quality decline, deadweight loss inefficiency, insurance moral hazard, renegotiation, hold up

problems (weakness of the party that has invested), quasi rent (suboptimal income due to tenant

pressure), and others.

2.1.3 Social Exchange Theory

Social exchange theory explains social and economic behavior where the interaction of

two parties actually takes into account the risks and benefits reciprocally. If the costs and

risks of a relationship exceed the benefits, then the party who obtains negative results will

leave or stop the interaction. This cost benefit and risk reward calculation applies to both

economic and everyday relationships. In economic relationships, each party seeks to obtain

maximum results in negotiations, including in the calculation of investment returns. In the

context of daily life, social exchange involves social relationships based on trust rather than

legal relationships, and is more implicit in the negotiations. Regarding the legal relationship

in a complete contract, social exchange underlies the decisions made by the promisor and the

promisee. It is often the case that the cost of enforcing the contract (ex post) of the promisee

is higher than the obligations that the promisee has to deliver. Conversely, the cost of

fulfillment (ex ante) exceeds the benefits received by the promisee.

Self-interest (Thibaut and Kelley 1959) encourages social exchange with the

assumption that individuals want to maximize their personal gain with minimum sacrifice in

a relationship. Suyanto and Amal (2010) refined the social exchange theory with network

theory, namely that social exchange does not only occur between two people (individuals

with individuals), but occurs by involving various parties, agencies, and organizations. Sekar

(2018) explains that there are four more values that perpetuate a relationship in social

exchange, where there is personal value, financial value, knowledge value, and strategic

value (personal value, financial value, knowledge value, and strategic value according to

Biggelman and Buttle 2012).

In communities with strong social structures, trust and the number and intensity of

relationships play an important role in collaborative agreements between horizontal parties

and further increase bargaining power (Gulati 1997; Coleman 1990). Trust depends on the

duration of the relationship, the consistency of exchanges between parties, and reputation

(economic and social).

2.2 Review of Previous Research

A review was conducted of research on success factors in the global value chain, in

contract farming and in agricultural investment.

2.2.1 Upgrading in the Global Value Chain

The production of Indonesia's smallholder and large coffee plantations ranks fourth,

after the coffee plantations of Brazil, Vietnam, and Colombia (Nalurita 2014). In comparison,

smallholder coffee plantations are the source of more than 90% of Indonesia's coffee

plantation production, of which 55% are unproductive, while Vietnam's coffee plantations are

modern plantations managed by both the people and the state, of which 30% are degraded.

Indonesian coffee sales compete with those of Brazil or Vietnam, following the global

supply chain pattern from farmers to the world sales network (Fitter and Kaplinsky 2002;

Minten 2017). In this study, exporters act as proccessors in sorting green coffee beans

purchased from collectors/cooperatives/farmers/farmer groups, and exporters also act as

dealers, playing the role of consolidators or logistics and financing functions (Caiazza et al.

2012). Exporters play a major role in the absorption of bean coffee production in Indonesia,

since more than 60% of production is absorbed by the export market. GVCs in coffee

commodities can be seen in Figure 1.

The lifestyle and daily life of the world's people have made coffee an important global

trade commodity. Data from the International Coffee Organization (ICO) shows that there

has been an increase in both coffee exports and imports in the last three decades. In the period

1990-2019, total world exports increased 63.24% from 4.84 million tons in 1990 to 7.9

million tons in 2019, while total imports increased 82.30% from 4.45 million tons to 8.09

million tons (ICO 2022).

Suprehatin (2023) observed positive and negative implications in terms of Indonesia's

direct and indirect participation in coffee GVCs. Several instruments for coordination and

rules and standards for contract farming and certification are also still variously applied in

GVCs. The increasing trend of domestic coffee consumption, which in 2016 reached 0.871

kg/capita/year, enables the development of local and national coffee value chains. This is also

in line with the development of coffee businesses in various parts of Indonesia, which is

expected to drive other related productive activities.

According to Sarwono and Pratama (2014), global competitiveness has eight

influencing factors, namely openness, government, finance, infrastructure, technology,

management, labor and institutions. According to Nardi and Todd (2007), Zimmer (2010),

Egbe (2010), Liu and Revell (2009), competitiveness in commodity markets reflects many

factors, namely comparative factors and competitive factors. Comparative factors include the

quantity and quality of available land, including climatic conditions. Competitive factors

include macroeconomic policies, namely monetary and fiscal policies. Based on the analysis

of Nalurita (2014), comparatively, Indonesian coffee has competitiveness in the international

market, which is supported by the condition of resource factors (nature, capital, labor, science

and technology), related and supporting industries, the role of government and opportunities.

Strategies that increase competitiveness mostly lead to technical and cultivation aspects.

Triennekens (2011) argues that upgrading the role of developing countries in the

Global Value Chain is difficult. Functional upgrading involves increasing the type of work

as well as adding additional roles at the intermediary level such as exporters collecting or

packaging. Value chain network structure upgrading describes the improvement of horizontal

or vertical cooperative relationships, as evidenced by more successful upgrading through

good relationships. Cluster upgrading is done in the form of improving the capabilities of a

community/group or an ecosystem in a region. Isenberg (2011) presents the factors required

for small business development in the form of six domains, namely human competence,

infrastructure, government leadership, market access, access to finance, and entrepreneurial

culture building. Rehber (2007) concluded that to support fairness, balance, and ecosystem

development, contract farming cooperation between large and small power actors requires

government intervention. Neilson (2015) says three broad strategic opportunities can be

identified for Indonesia to improve its position in the global value chain in the coffee sector

by Improving product quality (Developing differentiated quality coffee products in order to

increase the added value of arabica coffee, particularly at the farm level), Functionally

increasing added value (Developing further opportunities at the national level to increase the

added value of green coffee beans through coffee processing instant and roasted coffee for

both domestic and export markets, especially robusta coffee), and Increasing value through

more efficient processes (Improving farm-level productivity, livelihood security and

sustainability by encouraging new models of technology transfer to farmers that may include

increased private sector involvement, thus supporting the trend).

Partnerships between agribusiness companies and smallholder plantations are expected

to increase production by using company resources, both through investment in planting, as

well as technical assistance in human resources, management assistance, financing and

marketing (Minten 2017; Musara 2015). In mapping coffee planting activities (Taufik 2013),

it is necessary to provide inputs and facilities, such as land preparation, seeds, seedlings,

fertilizers, and pesticides. In coffee tree maintenance activities, the provision of fertilizers,

pesticides, and weeding and pruning equipment is required. In coffee harvesting activities,

harvesting equipment, post-harvest facilities, and storage warehouses are required.

Coffee plantation businesses, like other agribusinesses, have various types of risks in

their value chain activities (Adnan 2018). Coffee production has a variety of risks from

climate change/rainfall/drought as an agribusiness-specific risk (Singla 2012), market risk,

management risk, legal risk to financial risk. Plantation companies have better risk

management mechanisms than smallholder plantations, through crop diversification, forward

contracts, hedging, and others (Velandia 2009). The internal risk and sustainability of

smallholder agribusiness is determined by the features of the plantation, the behavior of the

farming family, the amount of family debt and risk aversion (Ortmann 1992).

Farmers use various methods to reduce risk, including contract farming partnerships

and by saving reserve stocks of coffee for good prices. Contract farming between sellers and

buyers involves coordinating the production and supply of harvested products, with the price

and quantity of production set in advance by both parties (Ton 2015). The contract farming

method is a tool to reduce risk and uncertainty for both sellers and buyers. The method of

saving harvested stocks is one way of accumulating assets that can be useful in difficult times

or speculating on better prices. In general, farmers are risk-averse and can accept both the

savings method and the contract farming partnership method (Adnan 2018).

2.2.2 Contract farming success

According to Rustiani et al. (1997), contract farming has two main principles: contract

farming as a working relationship in production and contract farming as a risk transfer

mechanism. In negotiations in contract farming, buyers and sellers are motivated to take part

in social contracts to build volumes exchanged and reduce resource costs (Bezabeh 2018).

Contract farming as a risk transfer mechanism is a risk distribution mechanism. Ideally,

contract farming is done to reduce the risks faced by both parties. Contract farming will

reduce the risk faced by the nucleus if it has to rely on sourcing raw materials entirely from

the open market. The nucleus company will also There are other benefits as they do not have

to invest in land and manage large farms. For the farmers themselves, contract farming will

overcome common problems they face in the risk transfer process. According to Glover and

Kusterer (1990), common problems faced by farmers include competitors adopting new

technologies, weak input supply conditions, weak human resources, difficult access to credit,

limited and unstable markets. International markets that promise better prices than local

prices are difficult for smallholders to reach. The risks created by these problems are

transferred using contract farming which is summarized in detail in Table 1.

Partnerships have several contract formats, such as procurement contract, partial

contract, or total contract (Singla 2002). These contract forms indicate the level of

integration/level of orchestration, where in a procurement contract, the buyer agrees on the

quantity and quality without providing facilities, while in a partial contract, the buyer

provides some specific materials/facilities, and in a total contract, the buyer requires the

overall use of materials and working methods (Ton 2015; Minten 2017; Ba et al. 2019).

Companies select potential partners based on, among other things, the features/results of the

plantation, proximity to the company's location (Berret et al. 2012).

Contract farming is a form of orchestration that better connects production, proccesing,

and marketing (Adnan 2018; Wang et al 2014; Ton 2015; Minten 2017; Ba et al. 2019;

Nguyen 2015; Hank and Priyanto 2018). Smallholder plantations or farmers get better seeds,

and other assistance from plantation companies, so they can produce more, which increases

their income (Bellemare 2010; Cahyadi 2016). With partnerships, transaction costs can be

reduced and the quality of crops can be improved (Da Silva and Ranking 2013). As a

transaction cost theory-based management strategy, partnership transaction costs are

considered from ex ante costs, in the form of pre-operational research costs for the selection

process, and research/price information costs during negotiations, and from ex post costs, in

the form of control costs and compliance implementation costs, including mediation/dispute

resolution costs.

Furthermore, Lajili et al. (1997) in their research uses an empirical approach that

combines elements of principal-agent theory and Transaction cost theory was used to

determine farmers' preferences for contract terms in crop production. Farmers' preferences for

levels of cost sharing, premium prices, and financing arrangements are significantly

influenced by asset specialization and the uncertainty associated with the situation and by

selected business and personal characteristics.

Anh et al. (2019) in their research stated that there are various factors that can influence

the occurrence of contract farming. The results showed that in the multinomial logistic

estimation, the attributes that influence contracts in coffee farmers are price choice, delivery,

technical assistance, input provision, monitoring, and supervision. Overall, farmers will

usually contract with companies that provide positive benefits related to price choice, input

provision, technical assistance, and delivery procedures. Socioeconomic aspects that can

influence farmers' decisions on contract farming are institutional arrangements and attribute

transaction costs.

Rosanti et al. (2019a) in their research stated that in contract farming there are

variables that can influence farmers' participation in contracting. These variables are area,

distance to intermediary traders, and proportion of income from coffee farming. Contract

farming can increase productivity, increase selling prices and reduce production costs, and

have wider sales access (Rosanti et al. 2019b). Contract farmers have more marketing channel

options than non-contract farmers.

Harish (2019) states that contract farming can improve the standard of living for

farmers. After the farmers took up contract farming, they started investing in private equity

funds. This shows that farmers' welfare has improved with contract farming. Meemken and

Bellemare (2019) in their research explained that contract farmers on average earn about 10%

higher income when compared to non-contract farmers. Contract farming increased the

average price of rice farmers in Benin by 11 percent (Maerten and Velde 2017), in apple

farmers in China by 8 percent (Miyata et al. 2009), and in coffee farmers in Lampung by 6%

(Rosanti 2020). Based on these results, it can be concluded that the success of contract

farming is measured by improving the welfare of farmers.

Another study that explains the motivation for contract farming in Indonesia is Patrick

and Daryanto (2004) where the results of their study explain that the main factors for farmers'

participation in contract farming in Bali are influenced by their ownership status of irrigated

land and their membership in farmer groups. Thus, this system is no longer individual but

more characterized by groups with shared capital. Bellemare (2021) in his research also

reviewed the literature on contract farming in Asia, namely the selection of farmers to

participate in contract farming, contract design, law enforcement, and the impact of

participation in contract farming.

Watanabe et al. (2017) stated that to achieve the quality desired by consumers

"Pingado" contracts between farmers and agro-industry in a quality-based system carried out

in a hybrid form. The results showed that the interactions that occur between the private

sector and the agro-industry are in the form of a hybrid system. The public sector can influence

the transaction mechanism in terms of undertaking obligations for farmers in contract

farming. Setboonsarng (2008) in his research concluded that although there is a tendency to

be biased against smallholders in contract farming, previous experience shows that contract

farming of labor-intensive or high-value crops for smaller niche markets tends to be pro-poor

and should be further promoted.

Nguyen (2019) studied coffee smallholders' preferences in Daklak, Vietnam for three

partnership models (Informal, Intermediary, and Nucleus models, without studying

Multipartite and Centralized models). Vietnamese smallholder farms have a land area of

under 2 ha, with 62% at 1-2 ha. The Nucleus cooperation format describes a pattern where the

company provides the facilities and becomes the buyer at an agreed price. The agreement

form regulates input provision, quantity, quality, procurement, and control. The Informal

model specifies the quality of production that the buyer will receive and states the obligations

of both parties, without stipulating the price or facilities, which sometimes leads to disputes

or incidents of failure to deliver. The agreement form regulates quantity, quality,

procurement, and control. The intermediary model is used by large exporters, where the

exporter compensates the farmer cooperative for coordinating the production and logistics of

purchasing from smallholders. The form of agreement regulates the provision of inputs,

quantity, quality, procurement, and control. In the Nucleus model or inti plasma, 17% of

cooperation types in Daklak, the company and smallholder plantations have a 5-6 year

contract, strict supervision of production, and implement profit sharing and risk sharing. In

general, farmers want agreements that regulate the quantity, quality, procurement, control,

and provision of inputs. Farmers prefer input provision by agribusiness companies, but not

control.

The objective of contract farming is to minimize the costs associated with the

production of a particular commodity, therefore contracts require in-depth analysis: contract

negotiation costs, maladaptation costs, operational costs, and maintaining good relations with

farmers (Simmons 2005, Sitorus 2019). Williams and Karen (1985) point out that Contract

farming will be sustainable if

(a) Effective enforcement of contracts in accordance with a sound regulatory and judicial

system, (b) Companies involved with contract farming have monopsony power over farmers

by implementing a number of alternatives aimed at marketing and income generation.

2.2.3 Agricultural Investment Success

Agricultural investment risk based on contract farming is a relationship specific

investment (Besanko 2013, Mugwagwa 2020), where investors are tied to the choice of land

and crop type, proximity of location, specificity of work methods and expertise, and have

specificity with the intended market. This research is based on the need for resource

investment, namely investment in sustainable coffee farms by replanting coffee trees. Current

coffee farms have reached low productivity for replanting investment. The optimum time for

replanting is when, if replanting is carried out, the company will obtain high profits in annual

units. According to Ernah (2010), the determination of the optimum time for technical

rejuvenation is based on crop productivity without taking into account input prices, output

prices or profits, while determining the optimum time for replanting is economically based on

cash flow.

There are three concepts put forward by Faris (1960) based on determining the

optimum time of rejuvenation for its economic life, namely: when additional net income

(marginal net income) equals average net income, additional net income equals anticipated

net income, and annual net income equals amortized net income.

Common parameters used for investment feasibility besides Net Cashflow, Net Present

Value, and Amortization of Net Revenue are Internal Rate of Return, Return on Investment,

and Payback Period. Determination of investment feasibility in plantations can follow some

additional parameters, namely Benefit cost ratio, Annual Equivalent Value, and Composite

Performance Index. The first harvest speed approach has weaknesses in the calculation of

achieving the best return (Sugiharto et al. 2014).

According to Sanyal (2015), a manufacturer's interest in investing in plantations

depends on the strategy taken. Glenorna coffee's decision not to backward integrate into

coffee plantations is based on financial ratio, financial performance, and coffee supply

studies in various producing countries. In this pattern, competitive advantage is obtained from

resource orchestration, where the parties have their own resources that are combined to

create an integrative advantage, and this is different from the competitive advantage obtained

by backward integration.

According to Machiavello (2015), in a study in Costa Rica, exporters and coffee mills

get certainty of supply in the form of physical coffee, because external suppliers will tend to

default when they can sell at a better price (sideselling). With inter-firm trading insulated

from the influence of market prices, integrated sellers get better prices when prices fall and

integrated buyers get cheaper prices than external suppliers in general. Although foward

contracts (future delivery) are available, less than 50% of the contracts are signed within a

month, and on average they are contracted within 3 months of delivery, so this does not

provide price and supply certainty for the exporter or coffeemill.

According to Ba (2019), the Small Farmers Large Field (SFLF) form of cooperation in

Vietnam allows companies to contract efficiently and homogeneously with groups of rice

farmers who combine 100 ha to 5000 ha of land. SFLF synchronizes planting methods and

schedules in an organized manner. The SFLF activity was initiated by the Government in

2013 to increase the investment of exporting companies in the rice sector, where farmer

partner selection and company matching activities are carried out continuously, as an

improvement from the promotion of contract farming partnerships in 1980. The program

encourages exporters to invest in infrastructure, and has established a modern integrated

supply chain (Dement 2017).

Similar development is carried out in Indonesia in the form of a farmer corporation, a

farmer economic institution incorporated in the form of a cooperative or other legal entity

with most of the capital ownership owned by farmers (Munifah 2019). Farmer corporations

are created with the principle of economy of scale to optimize the management of agricultural

resources by creating value chain integration from upstream to downstream, providing

facilities and infrastructure, post-harvest handling, and optimizing supply chain management.

The entire Farmer Corporation cooperation is managed by a competent management group,

as Corporate Farming. This system has not been sustained due to unfair profit sharing and

farmers' reluctance to include land ownership in farmer corporations (Prasetyo 2018).

The reluctance of smallholder farmers or plantations to participate in partnerships can

be reduced with promotion and incentives from the Government (Ba et al. 2019). With

incentives and promotion, partnerships have been shown to increase production even with

new trees planted on private land (Permadi 2015). The availability of agricultural

management training and the availability of investment are incentive factors driving

participation in partnerships. In general, interest in partnerships is based on reduced harvest

risk, improved technical and managerial skills, increased income with existing capital, and

improved social status as a partner.

According to Ba et al. (2019), the greater the amount of debt/dependence on finance,

the lower the level of autonomy of the farmer, and the higher the compliance with the way of

working specified in the partnership agreement. The plantation company outlines the type of

seeds that should be planted, the fertilizers that should be used, and equalizes the yield of the

partner's farm according to the company's planting guidelines (Minten 2017; Musara 2015;

Rosanti 2019). Positively, the expected production output of plantation companies can be met

from smallholder plantations, and vice versa, smallholder plantations avoid the risk of

problems arising related to seeds and fertilizers.

Farmers' income is directly proportional to land ownership (Musdalifah 2021), as an

illustration of income that some farmers are tenant farmers. Perhutani as the power of the

government that controls the land, has a profit-sharing pattern standardized in Law Number 2

of 1960. The profit-sharing pattern between landowners and tenant farmers is often found in

coffee cultivation in Sumatra (Rosanti 2020) and Java. If the investment and working capital

are made by the landowner, then after returning the investment and working capital, the

farmer receives 40%-50% of the yield. If the farmer makes the investment and working capital,

after the return of working capital and investment, the farmer's income increases to 50%-60%

of the yield. The problem of transparency in cost sharing and sales is complained about by

both farmers and landowners. Other problems that arise are the failure to start cultivation as

promised, or the termination of the cooperation when the investment has not yet yielded for

the tenant farmer.

The current human resource problem is the reluctance of the young labor force in the

agricultural sector in Indonesia (Susilawati 2016). Postmodern self-concept, land tenure

factors, low succession of agribusiness management, encourage the young labor force to

diversify into non-agriculture. 70% of agricultural workers are over 40 ye a r s old, with

40% over the age of 50. As Comparatively, in Vietnam, over 60% of agricultural workers are

in the age range of 15- 20 44 years (Nguyen 2019). A contributing factor to the reluctance of

Indonesia's young labor force to move into the agricultural sector is the image of the

agricultural sector as less prestigious, high-risk, lacking in status guarantees, and income

stability and continuity. Rosanti's research (2020) shows that under current conditions, coffee

farms have not been able to fulfill household needs. Lampung farmers are on average 44

years old in the range of 20-78 years, with other income amounting to 40% of annual income

from non-coffee and non-garden.

Sengere et al. (2008) in their research related to the rehabilitation of coffee plants in

Papua New Guinea have a concept of cooperation between landowners and plantation

companies that can also be done in other damaged plantations. Plantation companies can help

restore the high quality of PNG coffee. The role of government agencies should also ensure

that companies adhere to sound business practices. Obihaka plantation management also

provides services to the community, for example in the form of subsidized education fees for

local children. The Obihaka plantation is starting to be used as a coffee center for farmer

extension and training, and has the potential to become a coffee processing center to improve

the quality of coffee produced from surrounding smallholders.

Agustin (2018) in his research states that farmers who participate in globally certified

sustainability programs have better economic performance compared to farmers who have

local certified and conventional contracts. This also applies to the aspect of better farmer

performance, where farmers with certified partnerships have better performance when

compared to conventional farmers. The approach to sustainable systems in agriculture is

currently very diverse and depends on the diversity of conditions in each region (Dalay-

Clayton and Bass 2002). The systems approach in sustainable agriculture is developed from

three basic pillars; namely ecological, economic and social dimensions. Furthermore, several

approaches are related to sustainable development, such as through ecological, economic,

social, cultural, ethical, institutional, political and security approaches. According to Adams

and Ghaly (2007) in their research to maximize the sustainability of coffee plantations and

industry in Costa Rica, the application of ecological industry has not been widely accepted by

the industry in general. A number of opportunities to maximize the sustainability of the

coffee industry can be through: (a) strategic application of cleaner production, (b) effective

use of resources, (c) use of alternative by-products, (d) efficient operational design, (e)

training, (f) introduction of basic environmental management concepts, and (g) changes in

industry structure.

Permadi (2017) explored the willingness of communities growing eucalyptus trees to

become plasma raw material providers in the Company-Communities Partnership scheme.

The choice experiment disaggregated communities willing to contract on a full and part-time

basis, community expectations for income, and motivations for implementing the partnership.

Communities expect the company-community partnership to improve social welfare and

safeguard the interests of the community, thus the Road construction to the village and

income protection during harvest are important.

2.2.4. Research Gap Analysis

The research gap analysis is an explanation of the differences between the results of

previous studies and this research. This research aims to find investment patterns in coffee

tree rejuvenation, both replanting, and how contract farming can play a role in the context of

investment to increase production. Several studies have been conducted on contract farming

of coffee farmers in Lampung, including Rosanti et al. (2019) and Rosanti (2020) which is a

comprehensive study of farmer households and contract farming practices. These studies

focus more on the variables that influence contract farming, while this study focuses on

contract farming for new tree planting. Likewise, previous studies that have been conducted

have differences and relevance and position with the design of models for investment and for

contract farming.

2.3 Framework of Thought

Based on the background and research objectives, this study began by identifying and

exploring issues related to coffee replanting in Indonesia, especially in Lampung as the

research location. Despite the low productivity, Indonesia has the potential to increase coffee

tree replanting. Therefore, it is necessary to invest in trees through contract farming clauses

to improve the competitiveness of Indonesian coffee commodities (Figure 2). Based on the

research background and objectives, as well as the research conceptual framework in Figure

2, a review of the literature and previous research was conducted. The review was made on

value enhancement in global supply chains, successful agricultural investment, and successful

contract farming. The development of the contract farming model conducted in this study

explores from three perspectives, namely the participation and conditions of farmers'

implementation of coffee tree rejuvenation activities, factors that influence the success of

coffee tree rejuvenation investments, and the design of cooperation involving a number of

actors involved in it. Farmers are interested parties in replanting activities, but lack the

capital to replace old coffee trees and reserve funds while the new plants are not yet

producing.

1.1 Data Collection Methods

Data collection in the research or study used literature study techniques, field

observations, interviews and discussions with experts and interviews with interested parties.

Researchers conducted in-depth interviews and focus group discussions (FGDs) with

respondents who are stakeholders in replanting activities, policy makers, and understand

coffee agribusiness. The respondents consisted of 2 exporters, 3 community extension

workers, 3 farmer groups, 10 collectors, and 3 banking officials. The research sample was

drawn using purposive sampling: 3 banks were 90% KUR distributors and the farmer group

areas studied were areas where farmers practiced contract farming. Interview The

questionnaire was conducted by means of a two-way conversation by compiling a list of

questions to obtain information from respondents. The models and forms of questionnaires

used are open questionnaires (Appendix 1) and closed questionnaires.

1.1.1 Descriptive Analysis

Descriptive analysis was used as a qualitative approach tool to present the results of

primary data processing derived from coffee agribusiness, analyzing the participation of

replanting investment/new coffee tree planting. The results of this study (Appendix 2) will

then be used as a reference in conducting further studies, in making social analysis and

making closed questionnaires (Appendix 3).

3.5.2. Soft System Methodology (SSM)

The SSM methodology (Checkland, Peter 2000) is based on a seven (7) stage process

that starts from the clarification of an unstructured problem situation through the design of a

human activity system that is expected to help improve the situation this conceptual model is

then compared to the problem situation in order to identify feasible changes. The results of

the normative process by SSM will be used as material to criticize the reality resulting from

the descriptive process. The explanation of the step is to create a rich picture of the problem,

and create a definition of the system to be changed (Root Definition), and structuring the

subsystem of steps to be taken (Purposeful Activity models) to achieve systemic change.

Iteration is done by comparison between conceptual models and reality: real-world thinking

situations (epistemology) in the process of creating conceptual models (shown in Figure 3).

3.5.3. Interpretative Structural Modeling (ISM)

Interpretative Structural Modeling is an analytical tool aimed at strategic policy

planning. Interpretative Structural Modeling analyzes the elements of the system and solves

them in a graphical form of direct relationships between elements and levels of hierarchy

(Appendix 4).

Saxena et al. (1992) in Eriyatno (2013) and Tyagi (2009) state that in using ISM in

program analysis there are nine (9) main elements that must be considered, namely:

a. Affected sectors of society;

b. Necessity of policy implementation;

c. Key constraints of policy implementation;

d. Changes to be achieved after the enactment of the policy;

e. The ultimate goal of policy implementation;

f. The benchmark used to assess the effectiveness or success rate of the policy;

g. Activities required for policy implementation planning;

h. Activity measures to evaluate the results achieved by each activity;

i. Institutions involved in implementing the policy.

ISM has four symbols V, O, A and X which are used to represent the direction of

influence of one criterion to another. The results of the sub-element research are then made in

SSIM in the form of a Reachability Matrix table by changing V, A, X, and O to numbers 1

and 0. The RM matrix is then corrected until it becomes a closed matrix that meets the rules

of transitivity. The RM matrix that has met the transitivity rules is then processed to obtain

the driver-power (DP) value and dependence (D) value to determine the classification of sub-

elements. Assessment based on ISM Cartesian diagram, Driver Power (DP) value and

Dependence (D) value to find element classification.

3.5.4 Financial Analysis for Biological Assets

The analysis technique in this research is descriptive analysis of financial statements

with the International Financial Accounting Standard (IFRS) approach. According to Riyadi

(2010), the international accounting standard that greatly affects plantation entities is IAS 41

which regulates agricultural activities. According to IAS 41 par. 5, biological assets are

plants or live animals. There are six financial aspects that are analyzed, namely 1) production

levels, 2) operating costs, 3) Profit & loss, 4) Balance sheet, 5) Cashflow, and 6) investment

feasibility. In the investment feasibility analysis, there are three types of calculations used,

namely Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP).

The cost and sales data are compared in Appendix 5, various production levels are simulated

in Appendix 6, and various assumptions for the feasibility test in Appendix 7. The simulation

results are used for the study of investment patterns.

1.2 Research scope

This study is limited to farmers in Lampung and is not yet a national mapping of coffee

farmers. The calculation of production costs and selling prices of farmers' coffee is based on

primary and secondary data obtained during the research period, using processes and

equipment found in Lampung. Productivity measurements used reference farm management

on productive land in the form of an overlay. The study has limitations in the agronomic

comparison of replanting methods, and also does not take into account the suitability of land

in forests or on slopes.

4.1 Analysis of farmer participation in coffee tree replanting

Farmers' income from old coffee trees is insufficient for household needs. Rosanti

(2019) showed that coffee farmers with 2 ha had income from coffee plantations of 35

million per 2 ha, with a 40% income contribution, and from other agricultural products in the

plantation, and honoraria from non-agricultural activities with a contribution of 60%.

Enveritas data in 2018 in Tran's research (2021) showed similar revenue, with 2142 tree

trunks/ha generating IDR 19 million, assuming a price of IDR 19,000/kg. Tran's research

(2021) shows that the average Sumatra robusta farmer owns 1.4 ha, with a density of 2142

trees per hectare, with a productivity of 0.7 tons of coffee beans/ha. Rosanti et al. (2020) in

their research related to coffee farmer households, found that the majority of farmers usually

lack capital to conduct rejuvenation. Both studies show that the majority of farmers do not

have the capital to be able to replant.

FGDs were conducted with key persons or stakeholders involved in financing and

replanting activities in smallholder coffee plantations involving banks, coffee farmer

extension workers, collectors and exporters. Follow-up interviews were conducted with the

three largest KUR channeling government banks to dig deeper into existing conditions

regarding financing in coffee plantations, by interviewing resource persons from the three

KUR channeling banks. Follow-up interviews and observations were also conducted with

three farmer groups of the Kopista community. Data from the above discussions are shown in

Appendix 4 and data related to replanting operations are shown in Appendix 7.

The problem with the replanting program is that farmers have to uproot the old trees

and plant new ones, which results in a 3-year gap without income. KUR requires installments

in years 1 - 3, there is interest at the end of the period, the bank earns about 6% interest a

year. The investment credit concept allows for grace periods and balloon payments including

interest during construction, but the bank balances the risk with credit insurance, high

interest and collateral. Farmers do not invest in new trees because they have not been able to

produce for the first three years (Rosanti, 2020). The current monthly income is insufficient to

cover the farmer's annual living expenses.

One of the problems besides replanting financing is that farmers complain about the

scarcity of fertilizers. Within the framework of contract farming, the availability of fertilizer

is agreed upon by the company before the farmer commits to replanting or replacing dead or

old trees with new trees. Replanting on new land starts with farmers preparing new shoots for

the following year, land clearing and preparing clean land, then farmers are given 250 kg of

fertilizer twice in the month of planting. The types of fertilizer availability provided by the

company include: NPK fertilizer, urea fertilizer, and KCL fertilizer. The difference in costs in

the survey between 2021 and 2023, the largest is in the cost of fertilizer where it was

originally IDR 1,750/kg of coffee which became IDR 5,250/kg of coffee. The amount of

fertilizer has an effect on production costs, from IDR 1,750/kg of coffee to IDR 5,250/kg of

coffee 9892/kg of coffee to Rp 13592/kg of coffee, but this was offset by the skyrocketing

world coffee selling price from Rp 19,000/kg to Rp 26,000-40,000/kg.

Some farmers buy other farmers' land in installments to increase production and

replant using the Kopista method. The Kopista method is socialized by community activists

led by Pak Karjo Mutajat, with successful farm competitions and relying on established

communities/successful role models. Farmers rely on Kopista extension workers to determine

the type of seeds to be planted on their land. Some equipment is still needed for farmers to

one day act as collectors and suppliers to exporters. Even without bank financing, the success

of the Kopista community has given millennial farmers confidence that they can independently

improve coffee productivity and quality on their existing land. When managing the farm in an

agribusiness manner, young farmers generate better income than other fields of work with the

UMR benchmark. Better future income opportunities from coffee. Kopista argues that old

coffee trees can still produce for more than 50 years, and can utilize good trunks. Replanting

is needed for a stand of 4000 trees and organizing the farm for good maintenance practices.

Kopista extension workers highlighted the difference in Kopista's method of

managing mentoring in contract farming. The company's mentoring method that has been

running in Lampung is to provide a class system for contract farmers, based on length of

work and achievement of targets, then provide incentives for farmer attendance, provide seed

guarantees to farmers and guarantee prices that can be received by farmers (in line with

Appendix 7). Meanwhile, Kopista's method is in the form of transformational assistance by

empowering farmers themselves to become agropreneurs/farm entrepreneurs, by conducting

field assistance, garden competitions, monitoring farmers' performance in achieving targets

and providing methods of garden maintenance and fertilizer use as well as providing an

understanding of coffee tree clones.

Based on the results of the interviews, it can be concluded that the situation related to

the scope of coffee plantation financing in general is:

1. Weather is a major risk that can hamper farmers' productivity. If a crop fails or is

affected by weather, it is important to think about how to deal with it in order to pay the

installments. There are still problems that farmers cannot deal with, such as excessive

rainfall, difficulty in fertilizer availability, and problems related to insect or fungal

attacks.

2. The income earned by farmers is still lower than the UMR and wages in big cities, so

millennial farmers are not motivated to return to the farm or invest in replanting.

3. During the off season, farmers sometimes have sudden personal needs, so they return to

loans to collectors. These loans are usually repaid at harvest time by handing over the

harvested coffee as payment. The rushed harvesting process results in low quality and

thus not optimum harvest income, with implications for the welfare of farming

households.

4. KUR to finance farmers' production is paid according to the harvest cycle, either

annually or seasonally. For some banks, payments are deducted by collectors. Collectors

and exporters need a fast cash flow during the harvest season, so logistical obstacles in shipping

or delivering coffee result in late receipts, requiring extra funds to buy coffee. Currently, KUR

has not yet expanded into coffee commodities, and banks require exporters as offtakers from

farmers/ collectors. The coffee plantation rejuvenation scheme cannot use KUR.

Based on the interviews with the informants above, it was found that farmers are

currently unable to carry out investment cooperation or obtain bank financing. Detailed

findings are as follows:

1. Income from coffee is limited so there are limitations on buying fertilizer and

replanting.

2. Farmers are unable to afford replanting due to capital constraints and the dependence of their

main income on old trees. To increase the size of their land, farmers pay installments to land

sellers. Farmers cannot rely on bank financing in the form of investment loans that require

collateral and installments.

3. Collectors and traders are not interested in farm investments or investing with farmers, so

they rely on their own abilities.

4. Farmers do not have the technical skills to achieve the profitability required by banks. In

addition, farmers as agropreneurs do not have the ability to manage coffee farms in a

business manner. Assistance is needed in this regard.

5. Farmer groups that have managed to produce large volumes collectively, hoping to improve

their status as coffee suppliers directly to exporters, still need conventional equipment, and

also need agricultural information systems for management.

6. The Kopista method can increase farmers' income with a productivity of 2 tons/ha with 2000

trees, and suggests replanting 4000 trees. However, because the method is not the same as the

conventional method, the Kopista method has met with resistance from people who are

accustomed to using the Good Agriculture Practice reference from the Ministry.

7. Replanting 4000 stems per ha on new land, requires investment credit and requires

sustainability for 3 years of immature trees. Bank financing is not suitable for farmers'

current profitability conditions, also in terms of collateral requirements, the amount of

interest paid during replanting, and the amount of installments during immature crops.

8. In order to obtain KUR and credit for new plantations, farmers need to meet the demands of

banks, which require exporters as offtakers. The offtaker acts as a recommender of which

farmers are creditworthy, as well as an agent for cutting farmers' installments. Banks need a

digital system to monitor supply chain transactions including fertilizer purchases and ensure

loan repayment.

9. Exporters need banking support and logistics support to be able to absorb future

copista/replanting products, whose production volume will increase 3-4x from the current

plantation.

4.2 Analysis of factors affecting the success of coffee rejuvenation investments

Researchers identify and dig deeper into the problematic situation related to coffee

plantation replanting activities, where in this stage researchers are expected to recognize the

situation, formulate, and take action to improve the problematic situation that occurs.

4.2.1 Stage one of SSM: Identification of the problematic situation (Situation Considered

Problematic)

In describing the situation of the above results, the researcher analyzed the institutional

and social influences and problematic situations in the system, with the results shown in table

3, and then outlined in figure 4 and figure 5. In general, the parties involved as actors in the

global coffee commodity supply chain are farmers, collectors (small-large), exporters

(Nasution 2023), in addition to roasters and cafes. The social and political analysis, which

was not apparent in the FGDs, is that the Global Value Chain actually influences forces in the

local ecosystem (Daviron and Ponte in The Coffee Paradox, 2005).

All actors in the domestic supply chain are price takers, which means they do not have

the power to determine prices. This market structure is formed due to the characteristics and

behavior of the actors in the coffee commodity supply chain in the global setting. Prices are

formed in the international market, and domestic actors use these prices as the basis for

determining the purchase price of coffee (base price). The flow of the supply chain in coffee

commodity trading takes different forms in each region. The biggest power (as well as the

biggest risk-bearer) in the domestic supply chain is the exporter, while the actor with the

weakest position in price determination is the farmer. The unfair and disproportionate

distribution of benefits in coffee GVCs further reinforces the coffee paradox, where coffee

commodity prices have increased but development, especially in coffee-producing countries,

remains slow (Suprehatin 2023, Daviron 2005).

The estimated needs analysis of the stakeholders in this study is detailed in Table 3,

describing the social conditions in the series of cooperation formed. The analysis was

conducted on stakeholders/actors involved in production financing activities. At this stage, it

can be seen that financing-related problems are a value chain that requires a solid and

sustainable cooperation in an effort to overcome all identified problems. This cooperation

must consider the role of each stakeholder, namely banks, farmers, exporters, and external

factors such as weather and the global situation. Figure 4 illustrates the situation related to

financing and offtakers, while figure 5 is related to replanting.

4.2.2 Phase two of SSM: Rich Picture Transformation of the form of cooperation built in the

framework of coffee tree rejuvenation investment

After knowing the description of the problematic situation faced, then the framework is

dissected by considering the activities between stakeholders by considering the problematic

situation so that the ultimate goal of this discussion can be achieved. In line with what is

formulated in the research method, the researcher will formulate a Rich Picture which aims to

help show relationships and assessments, use symbols to express situations and indicate

relationships that are relevant to solutions. This rich picture will clearly map the problems

faced by stakeholders.

Rich picture is a visual representation that describes the situation, actors, and dynamics

involved in the problem at hand. Based on descriptive analysis, the obstacles/limitations

faced in financing and affecting replanting include 1) Banks have difficulty selecting reliable

farmers, so they need collectors, 2) Banks have difficulty in risking farmers' business

continuity, requiring exporters as offtakers. 3) Farmers lack income to be able to repay loans

and pay interest, requiring increased income 4) Low production requires unconventional

methods for high productivity 5) Farmers do not have reserves for replanting in 3 years,

requires financing. 6) Farmers rely on old trees for income, requires increased productivity

and replanting capital. 7) Farmers lack facilities and infrastructure, need access and

cooperation, 8) Old farmers need young workers who understand technology and understand

agribusiness, 9) Exporters need buyers and certainty of supply related to quality and quantity,

10) Exporters have limited funds, need financing, logistics and marketing support to absorb

farmers' production, and 11) the whole system is vulnerable to changes in weather and the

global situation.

In this Rich Picture depiction according to Figure 6, in addition to stakeholders in the

form of rejuvenation system actors, researchers provide additional stakeholders, namely the

government as a regulator and as an actor in the coffee plantation system in Indonesia. The

government as the Ministry of Agriculture and the Ministry of BUMN engaged in seeds,

fertilizers, logistics, telecommunications, plays an important role in agriculture. The

government's position as the owner of public welfare issues, cross-sector policy makers,

budget user powers, and various community protection functions, is an absolute part of the

coffee plantation rejuvenation ecosystem.

Many countries, such as Thailand, Turkey, and some American states have laws and

specialized judicial institutions that support contract farming. The Competition Supervisory

Commission has procedures for handling complaints from parties to MSME partnerships. An

expedited court with a single judge can organize mediated dispute resolution under the

Competition Supervisory Commission, where parties enforce the judgment amicably and

voluntarily. The applicable regulation is an equitable basic agreement arrangement, including

risk and liability sharing, along with rules related to force majeure. This aims to provide legal

certainty of the rights and obligations of the parties concerned with contract farming and

replanting, in addition to maintaining the balance and fairness (Rehber 2007, FAO 2001) that

would occur in an incomplete contract.

The Ministry of Finance provides financing funds in the form of Supermicro People's

Business Credit with a limit of 10 million, Micro 50 million, and Small 500 million, which

does not require collateral, for easy credit approval. In the credit agreement, the bank requests

the clear address of the landowner and tenant farmers, so that an accountability and

transparent system can be implemented regarding the collateral-free credit agreement that is

prioritized for the needs of tenant farmers and farmers without assets as collateral

requirements. Although KUR is designed to finance farmers without collateral, the lending

banks have established conservative procedures to ensure repayment of the state fund loans.

The issuance of farmland certificates, and the distribution of farmland, are programs that

indirectly help farmers obtain collateral for financing.

4.2.3 SSM stages three and four: Root Definition and

Purposeful Activity Model (PAM)

The third and fourth stages of SSM are root definition (RD) and Purposeful Activity

Model (PAM) creation. Root definition is a clear statement of the activities that occur or may

occur in the coffee plantation under study. This root definition is based on information related

to the form of cooperation established in the context of coffee tree rejuvenation investment.

PQR Analysis

The root definition of the farmer's coffee tree rejuvenation investment system is the

business that farmers build in order to invest in new trees on their farms (P), through a

cooperation of financing and contract farming (Q), to achieve high farm productivity (R).

The contract farming subsystem in coffee tree replanting investment is a cooperation model

between offtakers and farmers (P), through assistance (Q), to achieve investment and financing

feasibility (R), which ultimately increases production and productivity. Furthermore, the root

definition obtained will be used as the basis for conceptual modeling.

CATWOE Analysis

The root definition obtained was tested and refined with the CATWOE analysis tool in

order to truly describe a selected system of relevant human activities. In order to determine

the formulation of cooperation between investors and farmers in the context of coffee tree

rejuvenation investment and define each group role into an approach called CATWOE

(Client or Customers, Actors, Transformations, World- View, Owner and Environment

Constraints). CATWOE identification and analysis based on the results of analyzing the

problematic situation related to financing, production, and supply chain. The CATWOE in the study is

shown in Table 4. The main customers who are the target and focus of investment in coffee tree

rejuvenation are coffee farmers. Actors as the main actors in the formulation model of cooperation with

farmers in the context of coffee tree rejuvenation investment are farmers, collectors/suppliers,

exporters, investors and financing institutions. The transformation carried out includes aspects of

production, financing, competence, and income.

Wordwide view is the creation or realization of an effective cooperation model that

must be supported by strong capital, because it covers production activities on coffee

plantations. Meanwhile, owners (issue owners) are parties who can or have the power to stop

or change the T process, which in this case is the government. Furthermore, related to

Environmental Constraints based on CATWOE analysis, namely constraints that come from

systems outside the scope of the model, which in this case are regulations and GVCs.

The conceptual model was based on Checkland (2000), in the following order:

1. Pre-defined root definition with PQR analysis and CATWOE analysis as well as

monitoring and control activities.

2. Starting with T and W purposeful activities as transformations.

The activities of the purposeful activity system for the conceptual model are as follows:

a. The activity to be transformed is the investment model built in coffee plantations.

b. The transformation process activities based on T and W are the concept of effective

cooperation, improving farmers' capabilities, efficient implementation, increasing

production and improving farmers' welfare.

c. Activities related to transformation results are the creation or realization of effective

cooperation that must be supported by strong and competitive financing/capital.

Based on the root definition of plantation rejuvenation, Figure 7 shows the activities

performed are: (1). Achieving investment feasibility. (2). Achieving banking-offtaker

cooperation. (3). Securing investment credit during replanting. (4). Getting better income (5).

Using weather-resistant and productive seeds. (6). Providing foster parent assistance. (7).

Ensuring the availability of technology and production facilities.

In the framework of farmer-banking-offtaker cooperation, a contract farming method

was created. The structure of activities developed in contract farming is as follows: (1)

transformation process of the cooperation model for coffee plantation replanting investment,

(2) efficient operational implementation, (3) improved access and status to financing, (4)

increased production and price/quality, (5) improved farmer welfare. These activities are in

line with contract farming practices in Lampung that can increase productivity, increase

selling prices, and reduce production costs (Rosanti et al. 2019b). Rosanti (2020) showed that

contract farmers receive technical support so that they are able to produce efficiently in terms

of fertilizer and labor, have higher productivity, and produce better quality at a premium price.

In financing farmers by banks and replanting, both situations require exporters as

offtakers. Figure 7 illustrates the need to form a new sub-system, in the form of contract

farming, which is structured with activities that currently occur and have a purpose in real-

world thinking that can adapt to external / environmental changes, namely the Global Value

Chain. As for the criteria for measuring the performance of the operation of the system of

purposeful activities, generally using 5 (five) criteria in Table 5.

4.2.4 SSM Stage Five: Comparison of Conceptual Model Activities with Real-World

Conditions

The conceptual model of coffee tree replanting investment is expected to provide

direction and strategies for regulators, investors, farmers and other actors in the future to

achieve an optimal coffee tree replanting investment model. Comparison between conceptual

model activities and real-world conditions results in implementation or activity gaps and

requires activity changes, shown in Table 6.

4.3 Analysis of Cooperation Model for Coffee Tree Replanting Investment

In order to find the formulation of cooperation between investors and farmers in the

context of coffee tree replanting investment, key sub-elements of various replanting

problems/obstacles from the main parties are determined. The method of calculating

biological assets in the form of pre-productive plants, and annual net value, can recommend

the best solution.

4.3.1 ISM Analysis for Coffee Tree Replanting Investment Activity Structure

Saxena et al. (1992) state that in the use of ISM, in the analysis of a massive new land

replanting program involving banks, there are nine main elements that must be considered. In

this study, program needs and activity size were not used in the analysis, so seven elements

were analyzed (Table 7):

a. Affected sectors of society; communities that will be affected by the replanting investment

plan: coffee farmers, input suppliers, banks, traders and collectors, exporters and

landowners.

b. Farmers will be actively involved in investment activities. Exporters will act as offtakers

in the financing framework and as responsible for production inputs in the contract

farming framework. Agricultural extension workers will be involved in mobilizing

agricultural programs and formulating replanting program policies. Collectors and banks

will be involved in financing and loan repayment. Government institutions involved in

implementing the policy include: Ministry of Agriculture related to agricultural

digitalization, coffee farmer counseling, and central and regional strategies. The

Coordinating Ministry for Economic Affairs oversees the Ministry of Finance/Financial

Services Authority regarding banking regulations and KUR, the Ministry of SOEs

regarding regional enterprises and input providers, and acts as an actor in the food system.

The National Research and Innovation Agency handles technology and breeding, which is

related to the Ministry of Agriculture and SOEs.

c. Main constraints/limitations of replanting investment policy implementation; For

replanting credit, there is currently no suitable financing. The collateral requested by

banks may not necessarily match the collateral that farmers want to submit. Farmers

themselves do not have the motivation to replant due to lack of capital. Even if they have

the desire, it is difficult for farmers to increase their production area. The current

production area is full of old trees, the seeds used are not good, it is managed in a

conventional way and young labor is scarce. The available guidelines are not seen as

easily successful.

d. The desired change is for the investment program to work; the availability of farmer

financing encourages farmers to make investments. For banks, the availability of offtakers

and the certainty of collateral policies are essential. Return on investment requires changes

in working methods to increase production. There is a change in farmers' income so that

investment attracts many farmers and investors. For farmers and owners, there is a need

for socialization and assistance related to replanting.

e. Activities required: offtaker agreements, credit agreements, application of production and

rejuvenation techniques, mentoring of entrepreneurs.

f. The ultimate goal of implementing replanting; increased coffee production, increased

number of farms, improved welfare, effective credit distribution, more productive land

utilization,

g. Benchmarks used to assess the effectiveness or success rate of the policy; With the change

in the policy of the new plantation investment program, it is expected that replanting will

be carried out, there will be an increase in production, smooth credit growth, and an

increase in farmer capital.

The Interpretative Structural Modeling (ISM) analysis, in addition to generating key sub-

elements, can also identify the hierarchical structure of linkages between sub-elements and

the influence (driver power) of sub-elements on other sub-elements (Appendix 4). MICMAC

analysis was used to group the factor elements of each sector/cluster/group based on DP and

D values. DP values were obtained by summing the relevant rows of the reachability matrix

(RM). The D value is obtained by summing the relevant columns of the reachability matrix

(RM). A summary of the key elements and sub-elements in the development of coffee

replanting contract farming can be seen in Table 7.

From the ISM analysis, the method of increasing production by farmers for both new

and existing farms is a priority constraint. Farmers also need changes in the form of

cooperation with banks and offtaker/exporter for replanting, with the aim of increasing coffee

production.

4.3.2 Financial Analysis for Cooperative Investment in Coffee Tree Replanting

A summary of field data from Kopista Community regarding investment fund

needs and cost calculations and data from Rosanti's (2020) research i n Appendix 5, provides

an overview of bank financing and profitability of farm replanting as in Appendix 6 and

Appendix 7. Simulations of these data are shown in Tables 8, 9, and 10, to determine the

feasibility of farmers' investments. In the first simulation (Table 8), compared to farmers

investing in replanting with 2000, 3000, and 4000 tree trunks with bank interest rate

Table 8 illustrates the price sensitivity in coffee replanting with 2000 trees vs. 4000

trees assuming a 6% bank loan interest rate and based on conservative assumptions at 1.7

tonnes/ha per 2000 trees. Replanting with 2000 trees is loss-making at IDR 20,000/kg, and

sensitive to interest/risk free rate increases when coffee prices are at the IDR 30,000/kg price

point. Investment 4,000 trees is safe enough for farmers, even though there is an increase in

the interest/risk free rate and a price drop to Rp 20,000/kg. At a coffee price level of IDR

30,000/kg, replanting 2000 trees is still profitable. Farmer profits in 2020/2021 calculated

with 2000 trees/ha at a coffee price of IDR 20,000/kg have been simulated for 2021 and 2023

fertilizer costs (Appendix 6) The 2023 fertilizer price has increased 3x from the start of the

study in 2021, and the simulation of with this 2023 cost shows that replanting is more feasible

at 4000 trees even at the lowest decade price of IDR 20,000 as in 2021. From the Rp

30,000/kg price calculation, the 4000-tree investment (Rp 256 million) has the shortest

payback period (6.1 years) and has the highest NPV (Rp 287 million). Simulated price of IDR

20,000 and Rp 30,000 illustrates the Kopista method's recommendation for

replanting 4000 trees/ha is appropriate.

The second simulation (Table 9), where the farmer invests in gradual replanting from

2000 old trees to 4000 new trees, by removing 500 old trees and replacing them with 1000

new trees. The replanting scheme can be applied to the farmer's current 1 ha management.

This scheme can be implemented without waiting for a new investment credit/KUR, and

without eliminating the farmer's current source of livelihood. With a target of 4000 trees per

ha planted on his/her land, the farmer can gradually allocate the planting of 1000 new trees in

the area of cutting 500 old trees (25% of 2000 productive stems) as shown in Table 8. Each

year 1500 old trees produce 1.5 tons/ha. In year 4 when 1000 new trees are harvested, 500 old

trees will be cut down, and replaced by 1000 new seedlings, with productive trees totaling

1000 productive old trees and 1000 productive new trees. And so on until a total of 4000 new

productive trees are reached.

With a risk free rate of 7% and KUR interest rate of 6%, planting 4000 new trees has

an NPV of IDR 97,719,726 with an IRR of 17.6%, and a payback period of 9 years without

taking into account the income of 2000 old trees. This investment scheme is able to The small

KUR program is available with a 5-year tenor, which can be extended for another 5 years.

When combined with the income of the old trees, the phased replanting of 4000 new trees has

an NPV of IDR 161,756,478, with an IRR of 60.7% and a payback period of 4 years. This 4-

year calculation on a 1 ha plot illustrates that phased replanting on a 1 ha plot is profitable for

the farmer and can be financed from the harvest of the old 1500 trees and can be accelerated

from a 500-tree replacement to a 700-tree replacement.

Operational:

The third simulation compares the net present value of the farm investment when

owning the farm for 15 years and for 30 years, to show the increase in the value of the farm

as a potential profit sharing or farm sale. From the 30-year simulation of 4000 years of

gradual replanting in table 10, it is illustrated that the 30-year NPV is 710 million, an

increase compared to the 15-year simulation NPV of 161 million in table 9. With the use of

bank credit in simultaneous replanting, the 30-year NPV is 725 million (table 10) and the 15-

year NPV is 287 million (table 9). The NPV of 3000 simultaneous trees at 15 years (162

million) differs slightly from the NPV of 4000 phased trees (161 million), but in the 30-year

calculation, the NPV of 4000 phased trees (710 million) is higher than the NPV of 3000

simultaneous trees (469 million) and close to the NPV of 4000 simultaneous trees (726

million). This shows that there is an increase in profit and farm value from year 16 to year 30.

30. In addition, from the financial data, the value of farm assets increased from year 10 to

year 30, indicating an increase in farmer wealth. In this simulation, additional investment in

equipment replacement is made, and remains profitable. Thus, a farm will be able to be sold

in the remaining period of the farm's life.

The calculation of biological assets allows for passive investment as well as sale and

purchase schemes according to the remaining life of active farms. The separation of functions

between land The owner/landowner and farmer (Morrison 2020) and profit-sharing practices

in plantations allow for several investment schemes for new plantations and replanting to be

undertaken by landowners and tenant farmers, landowners, tenant farmers, and investors. At

the time of dissolution of cooperation or sale and purchase, the overall value of biological

assets is obtained from the NPV value of annual income according to the remaining

production period. The annual asset value is calculated from the profit after sales minus the

total annual operating costs.

Access to accurate data is a necessity for the model to be able to ensure the

sustainability of the farmer family business over the financing period, coupled with the need

for facilities and technology. Data disclosure is also required by passive investors that

farmers expect to cooperate in capital/equity ventures. The issue of accountability is a

common dispute between landowners and farmers. Banks and offtakers are the driving force

for the digitalization architecture of the coffee plantation management system, namely the

identification of strategic directions, goals, and initiatives of the system (Suroso et al, 2022).

Digitalization of bank financing is useful in farmer accountability in finding passive

investors. This management system is also a reference for offtaker assistance in the contract

farming scheme. IT systems and technology are also needed to get young people back into

modern agriculture (appendix 4). The architecture provides a clear description of the

contribution of information technology in achieving the management goals of a commodity

so that it can play a major role in GVCs.

Increasing coffee production starts with empowering farmers to prosper through

increased income from coffee. With Kopista's pruning model, farmers have higher incomes,

qualify for credit and have funds to invest. Subsequent replanting investments were made on

1 ha of land from 2000 trees to 4000 trees as suggested by Kopista. The 4000-tree replanting

activity can then be carried out in the following three options:

1. Gradual investment in own farm. (NPV 710 million).

2. Invest in own farm as well as bank loan. (NPV 725 million).

3. Profit-sharing expansion investment with other farm owners/croppers (NPV according to

profit-sharing scheme and remaining farm life).

In a 4000-tree phased scheme on one's own farm, replanting activities without

investment credit can be carried out in 4 to 12 years. In contrast, the production of 4000 new

trees on new land can be carried out simultaneously in 4 years if supported by investment

credit because of the much larger production input factor.

4.4 Contract Farming Model Design for Coffee Tree Replanting Investment

Figure 8 summarizes the synthesis of the three research objectives, and the implications

for the development of the contract farming model shown in Figure 9. The activity structure

shown in Figure 9, to address current productivity issues, replanting issues, and post-

replanting challenges, illustrates the required contract farming design.

The scheme to increase production is the first step of replanting, where farmers can

increase productivity and improve welfare, and then followed up as part of the contract

farming program. The structure of the activities undertaken are: 1. Increase production on

current land with the "min2ton" program. 2. Determination of investment method according

to financing: own land in stages, replanting at once, or land cooperation. 3. Selection of

farmers receiving credit and contract farming, followed by credit agreements and appropriate

offtaker/contract farming agreements. 4. Application of technology in plantation production,

credit, and supply chain. 5. Enhancement of agribusiness ecosystem competencies in GVCs.

In the productivity improvement stage, the incomplete contract approach depicts

farmers without contracts or with contracts as existing farm investors who depend on users of

farm products. Existing assets in the form of coffee farms are a source of annual income and

farmers do not have the capital to make changes to the use of farm assets. Regarding the

production process, farmers do not have the technical ability to build farms according to the

"min2ton" program and have difficulties in terms of fertilizer scarcity and risk mitigation.

The provision of extension workers to assist in achieving production targets in farmer groups,

socialization of changes in pruning and fertilization methods, and the availability of non-

subsidized fertilizers at the farm level, are the main activities that can be carried out by the

Government. This is in line with the role of various Ministries and SOEs as regulators and

also as actors in the production value chain. Government intervention is needed as the Owner

of the productivity improvement program, as part of efforts to increase competitiveness.

For the success of the program to increase farmers' production by at least 2 tons/ha, the

government assigns independent extension workers or private extension workers/exporting

companies to conduct special technical guidance to increase productivity. The government

can utilize the existing supply chain, for the implementation of productivity programs

including as an offtaker and reporting the farm gate price ratio. The government provides

mitigation for price floor guarantees when world market prices are below IDR 20,000/kg.

The government binds with exporters (exporters act as intermediaries) in an open manner for

the assignment of exporters to carry out the purchase guarantee of smallholder coffee and the

government maintain the risk of loss. Exporting companies have been dealing with collectors,

not directly with farmers, and have limited information and ability to enter into agreements

with farmers. The collector is the party that can contract with farmers in various places

verbally or informally, and the collector has distribution options. This incomplete contract

and informal contract farming approach between collectors and farmers allows for easy

adoption of the program and does not place actors with ex ante or ex post obligations in the

form of litigation readiness costs due to performance measures (Scott 2005). The proposed

model to encourage increased production is the informal intermediary model (table 12).

Conclusion:

Based on the results of the research analysis, it can be concluded that there are several

important issues in this research as follows:

1. No supply chain actor is interested in investing in replanting/rejuvenating coffee

plantations except farmers. Farmers lack capital to carry out replanting. KUR and

investment loans are not suitable for farmers (tenor, collateral). The current replanting

capital problem cannot be solved by farmers with investment cooperation or bank

financing, because farmers' production figures are not feasible in investment calculations.

Another problem faced by farmers is the certainty of an offtaker for their production and

the availability of fertilizers.

2. The replanting program will be feasible if (1) farmers' production capacity increases, (2)

there is an offtaker that guarantees regular purchases of replanted products, illustrating the

need for contract farming, and (3) there is financing that suits farmers' conditions. This

combination illustrates the need for (4) synergy between replanting actors, and the need

for (5) technology/digitalization to support the interests of the parties.

3. In replanting investments, an active role of farmers in increasing productivity is required

and changes in financing products are needed. Changes are needed regarding the grace

period of the initial 3 years of immature crops (TBM) and regarding acceptable forms of

collateral. For farmers who have been able to increase production to 2 tons/ha for 2000

trees, there are three paths that can be taken to develop replanting: (1) farmers can replant

on their own land, gradually replacing 2000 old trees with 4000 new trees. (2) farmers can

replant 4000 trees at once, ready to harvest in 4 years with special investment credit. (3)

farmers can cooperate with landowners with a profit-sharing scheme. With good

transparency and accountability through information technology, replanting farms can get

passive investors with increased asset valuation at termination (Tables 8, 9, and 10).

4. The productivity improvement program is a priority for improving farmers' welfare as well

as the first step for replanting. The replanting program of 4000 trees/ha can be

implemented if the agricultural practices of the old 2000 trees have reached 2 tons/ha.

Contract farming to support replanting relies on targeted productivity increases, financing

for farmers, and increased cooperation between exporters, banks, and farmers. The

contract farming model follows the form of investment chosen by farmers in replanting,

starting with an informal intermediary model with a floor price to a multipartite

intermediary. By using a contract farming system, selected farmers can utilize the social

capital of a mutually beneficial supply chain to overcome gaps and challenges in

increasing the potential of agriculture in Lampung in the Global Value Chain.

SCM 463_ASU_ASSIGNMENT_2024_DESIGN OF A CONCEPTUAL MODEL OF CONTRACT FARMING FOR COFFEE TREE REPLANTING INVESTMENT

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