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El Salvador's coffee industry in serious trouble
The Tea & Coffee Trade Journal / November 2001

By Larry Luxner

SAN SALVADOR -- El Salvador, the smallest and most densely populated nation in Central America, also depends more on coffee exports as a percentage of its foreign exchange than its neighboring countries.

Which is why record low coffee prices might prove far more devastating here than anywhere else in Latin America. That doesn't even take into account the effects of two destructive earthquakes that shook El Salvador earlier this year, just as the country was moving to dollarize its economy.

"We never thought all these things were going to happen at the same time," says Julio César Medrano, manager of Agrotropical S.A. de C.V. "This past crop was already coming in low, prices were depressed, and then El Salvador suffered those two earthquakes. They hit a lot of the coffee regions, and a lot of plantations were damaged. Some of the people were working on the plantations when they were killed. After that, the people wouldn't go back to harvest coffee. For four or five months, the earth was trembling almost every day. At the end, all this coffee was lost."

Medrano says the first earthquake struck Jan. 13, just as harvesting of strictly hard been varities began. As a result, gourmet coffee sales dropped by nearly 75%.

"We lost almost 50% of the income we should have had from coffee," he estimated. "With prices still down, people are even talking now about not harvesting the next crop. Costs are higher than prices, and people are saying it would be cheaper for them not to harvest coffee."

Things are so bad that El Salvador has begun experiments to test the viability of low-quality coffee as an alternative fuel.

Reuters reported in August that El Salvador, along with Mexico, Colombia, Costa Rica, Honduras, Nicaragua and Panama, have agreed to cut 5% of total export inventories by destroying low-quality beans as of Oct. 1, when the 2001-02 coffee harvest begins.

Participating countries have pledged to either destroy the coffee outright or put it to other uses such as fuel, fertilizer or building supplies. In Salvador, the trials began at a cement factory 67 miles northwest of San Salvador. About 100 46-kg bags of poor-quality beans were used in initial experiments, said Alejandro Guirola, quality control chief at the Salvadoran Coffee Council (known in Spanish as the Consejo Salvadoreño de Café). Previous experiments have shown that coffee has a high calorific value when burned and could serve as a low-grade fuel.

Ruben Ernesto Pineda last year stepped down as manager of the Salvadoran Coffee Council, a post he had headed since 1989. He's now general manager of Cooperativa de Cafetaleros Los Ausoles S.A., a coffee cooperative whose 150 members produce a combined 100,000 bags a year.

"I was born in coffee," said Pineda, 51. "The coffee sector as a whole -- and this includes banks, exporters and producers -- has a big problem. Before this, our biggest problem was Brazil. Now, there are a lot of new producers, and we end up with very low prices because there's too much coffee in the world."

Complicating El Salvador's situation is the fact that 60% of the country's coffee is produced in lowlands.

"I don't think lowlands are going to stand a chance. They have very high costs of production and very low yields. Basically, in the cooperative that I'm working with, we have very little lowland coffee -- it's mostly high-grown and strictly high-grown, which I see as our only chance of surviving."

Pineda predicts this year's coffee crop will be around 1.8 million bags. In a normal year, that crop would amount to at least 2.3 million bags. To make matters worse, earnings have dropped by 60%, which in dollar terms means $200 million less in foreign exchange this year.

"We have good coffee, but we've done very little in marketing that product," he says. "I think the government has tried to help the coffee sector. We have different programs going on to try to save the industry, but the worst error is that we are not working at this moment in moving these people from coffee to something else.

"I deal with producers every day," he continued. "Most of the producers are thinking, how am I going to eat? What about the workers? It's been terrible all year long, with no work. Why haven't we had some social explosion out there? Basically because we had the earthquakes, and that meant a lot of work to remove the debris and start rebuilding."

Pineda says El Salvador's recent adoption of the dollar as its principal currency -- replacing the time-honored colón -- is also hurting the coffee sector, whose current cost of production is around $80-90 per bag.

"Brazil is going through a devaluation process, so they can print more money if they have to. Inflation will always catch up with you, but you're gaining time," he explained. "We cannot do that. At this moment, we have to gain time. Interest rates for loans did not come down as everybody thought they would, but interest rates in savings accounts came down immediately."

Medrano's company, Agrotropical, has been a leader in the gourmet coffee industry. Medrano says that before 1993, El Salvador didn't export a single bag of gourmet coffee. Today, between 3% and 4% of Salvadoran production consists of gourmet-quality coffee (while 15% of total production -- albeit the lowest-quality coffee -- is destined for local consumption).

"In the past, we were the major exporter of gourmet coffee to the Mediterranean, specializing in Italian roasters. We were only brokers," Medrano said. "Now we're heading into a new phase, getting involved in the actual picking and production of coffee that we need for gourmet exporters, and supervising the dry and humid mill process. There are a lot of little details, and you have to make sure it's done right."

Medrano conceded that his coffee lacks the body that some other gourmet brands like Guatemala's Antigua has. "We're going to try this new process which has only been done in Brazil, to increase the body," he says. "It's called semi-washed coffee, which constitutes 60% of the blend of espresso in Italian coffee."

El Salvador's biggest coffee exporter is Unex S.A., based in San Salvador. Last year, said company director Enrique Cordova, Uunex exported 350,000 quintales. This year, exports should rise to 480,000 qq, thanks to a joint venture Unex has made with another company, Exportadores Libby's S.A.

"It's been a difficult year because of the prices," Cordova told us. "That's why there isn't much to do in the farms. Obviously, coffee growers are not going to invest much in their fincas because of the high cost of production and low prices. So unless there's a recovery in prices, the crop will gradually decrease."

Carlos Eduardo Borgonovo, managing director of Borgonovo Pohl S.A. de C.V., says he's "weathering the storm" for the moment. His company, headquartered in San Salvador, exports about 70,000 quintales (hundredweights) of coffee a year. It also manufactures all the burlap and sisal bags used by the Salvadoran coffee industry, and exports bags to Honduras, Mexico and Guatemala.

"Right now, we're afloat," says Borgonovo, 31. "The economy is maintaining itself because of the dollars that family members abroad send to El Salvador. That gives us foreign exchange, and injects money into the economy. But the coffee crisis is increasing. Our biggest concern is that if we don't do something to maintain labor in the fields, there will be an influx of people to the cities, looking for work. And right now, there aren't enough jobs to be handed out."

Medrano warns that a collapse of El Salvador's coffee industry could have serious consequences for the environment as well.

"Coffee is important for El Salvador not only for the money, but because the last remaining rainforests in this country are coffee plantations. If they don't work those plantations, we'll lose these rainforests," he said. "In the end, the coffee grower does not give a crap about ecology. You have to give him better prices. If not, they'll sell their land for housing projects, and there goes the rainforest."

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