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U.S. tax dollars help Peru switch from coca to coffee
The Tea & Coffee Trade Journal / November 1998

By Larry Luxner

VILLA RICA, Peru -- To get to this dusty little farming town that bills itself as "the coffee capital of Peru," you have to take a one-hour flight east of Lima, land at the heavily guarded San Ramón military airfield, drive to the town of La Merced and suffer a grueling, two-hour trip by 4-wheel-drive over what deserves to rank as one of the 10 worst roads in the Western Hemisphere.

We made the trip in late August -- 15 of us in a convoy of four Toyota Land Cruisers and Chevy Suburbans provided by the U.S. Embassy -- arriving just before noon at the farm of Teodoro Estrella Contreras. Here, under deep blue skies and impressive mountain panoramas that contrast with the region's desperate poverty, Estrella proudly told us he's producing 30 quintales (hundredweights) of coffee per hectare, compared to the national average of six to eight quintales per hectare.

Working alongside Estrella at the Comite La Limeña coffee cooperative is Juan Díaz Simón. He says that besides coca leaf, coffee is the only crop worth growing here.

"Before, the subversives wouldn't let us grow coffee," the 23-year-old farmer said through an interpreter. "When the Sendero [Shining Path] was around, we could not tend our plantations. Now, we can make ends meet with agriculture. Coffee gives us a sufficient margin to cover our costs and make a small profit."

Down the dirt road a few kilometers is the Copaevin cooperative, whose 24 growers, including five women, have 405 hectares of farmland under production, including 162 hectares of coffee. So far this year, they have produced 2,195 quintales of coffee -- most of it organic.

U.S. Embassy spokesman Michael Greenwald says it's no small miracle that these farmers are actually able to grow coffee and get it to market.

"This part of Peru was controlled by terrorists and narcotraffickers," he explained. "Now we can take advantage of a window of opportunity, and we've brought down the price of coca to the point where growing coffee is profitable. The U.S. consumer, by buying coffee that comes from these plantations, will guarantee that these farmers will have a market for their products. When you drink a cup of coffee, you're literally helping in the war on drugs."

Indeed, it's a well-known fact that Peru is the world's largest supplier of coca leaves for cocaine production -- but few people know much about Peruvian coffee.

Like many peruanos, the U.S. Agency for International Development wishes that were the other way around. Over a five-year period, the taxpayer-funded agency is promoting a mammoth $107 million program to help the Peruvian government eliminate coca production and encourage the cultivation of coffee and other crops.

Michael Maxey, director of USAID's Alternative Development office in Lima, says out of $59 million authorized by Congress, $15 million has been spent so far; he expects the expenditure rate has doubled in the last six months, and is expected to level off at $30 million a year during fiscal 1999. Approximately half of the $12.5 million in 1998 funding for increasing legal economic activities has been invested in the coffee sector.

"The United States is supporting Peru's efforts to permanently move out of coca," says the Mississippi native, who has lived in Peru for the last two years and worked for USAID since 1981. "Our objective is to support the Peruvian government's National Alternative Development Plan and its overall goal of reducing current coca cultivation by 50% in the next five years."

At the moment, the program consists of 6,000 coffee farmers grouped into 300 committees with 15 to 20 farmers each. These campesinos are scattered through the jungle areas of Peru -- from Moyobamba in the north to Villa Rica and Merced in the center on towards the Apurimac River valley and Aquillabamba in the south, near Cuzco and the world-famous Machu Picchu ruins.

While tourists find the area spectacular, the region -- home to three million out of Peru's 24 million inhabitants -- contains some of South America's poorest people. The region's per-capita GDP is less than 25% of the national average, while infant mortality is almost double the national average, and chronic malnutrition affects up to 75% of all children.

Until now, the region's poverty made the cultivation of coca far more lucrative than anything else. As a result, Peru has become the largest supplier of coca leaf for cocaine production in the world. In 1997, it supplied enough coca leaf to produce 325 metric tons of cocaine hydrochloride -- equivalent to 49% of the world's cocaine hydrochloride potential (followed by Bolivia, with 27%, and Colombia, with 24%).

Enrique Alarco, whose company, Sensa, has been exporting organically grown products including coffee, amaranth, quinoa and sesame seeds for the past 15 years, says it hasn't always been easy -- even given the recent declining influence of the Sendero, a Maoist guerrilla group responsible for the deaths of tens of thousands of Peruvians.

"I've received many death threats from the traffickers. They hate projects like ours that pull the campesinos from them," Alarco recently told the Lima-based newsletter Noticias Aliadas. "The traffickers and guerrillas still exerted a lot of power over the campesinos, who were caught between two forces. They grew coca because it was the only way to make a living and were forced to live with the Shining Path out of fear."

Yet thanks to an interdiction strategy being pursued jointly by the U.S. government and Peru's authoritarian president, Alberto Fujimori, the price of coca leaf has fallen well below $17.50 per arroba (25 pounds) -- the breakeven point under which it no longer pays to grow the stuff.

"For over two years, the price farmers receive for their coca leaf has been below the cost of production. Coupled with interdiction is an alternative development program aimed at restoring local authority, increasing licit economic alternatives and improving basic and social infrastructure," says Maxey, adding that in the last two years, Peru has managed to slash the area under coca cultivation by 40%, from 115,000 to 69,000 hectares. That's more than the 45,800 hectares of coca leaf under cultivation in Bolivia, but less than the 79,500 hectares in Colombia.

"This kind of success is unparalleled in U.S. counternarcotics initiatives in Latin America, and provides what the country team believes is a model for successful elimination of coca production in the hemisphere," says a USAID report, adding that it's implementing a $12 million program over the next three years aimed at increasing coffee production on at least 16,500 hectares, increasing yields by 15 to 20 quintales (hundredweights) and improving quality to produce more coffee for the specialty market. "Coffee can replace coca -- they grow in the same areas and coffee provides a better return on investment."

When it comes to coca, unfortunately, Peru has no productivity problem whatsoever. Last year, its fields under cultivation yielded 1,890 kilograms of coca leaf per hectare, far better than the 1,530 kg per hectare recorded by Bolivia and the 800 kg/hectare reported by Colombia.

Nevertheless, the area of coca under cultivation in Colombia jumped by 25% in the same period Peru's production area fell by 40%. Why, asks Maxey?

"Because of the interdiction program implemented by the government of Peru," he says, answering his own question. "They shoot down any plane that maintains radio silence, covers its numbers and doesn't file a flight plan. If you don't identify yourself, they will shoot you down. There have been over 90 destroyed planes. So the air bridge doesn't work anymore. All of a sudden, there was no demand for the leaf, so the price collapsed."

Maxey directs a 16-person staff working out of the U.S. Embassy in Lima, and has contracts with another 200 people. He says Peru, which has an estimated 200,000 hectares of washed arabica coffee under cultivation, is well-suited to quality coffee exports for three reasons.

"Peru produces in a cycle that's different from Central America," he told The Tea & Coffee Trade Journal. Most of Guatemalan and Colombian production comes between November and February. Peru's cycle is March through June. Also, they say Peruvian arabic coffee has a unique flavor profile. It's not as acidic as the Costa Rican and it may not have the body of a Kona, but it's got characteristics that some speciality coffee buyers think are unique and desirable."

"The third reason is price. Currently, the New York Coffee, Sugar and Cacao Exchange assesses a 4-cent-a-pound penalty on Peruvian coffee. It's a negative here, but it makes Peruvian coffee more attractive there."

Maxey, who gave U.S. coffee buyers and processors an outline of his agency's program during a recent Specialty Coffee Association of America meeting in Denver, says he's trying to arrange a visit by SCAA officials to Peru's prime coffee-growing regions.

"The purpose of the trip is for them to come down to see production areas," he said. "We're trying to provide a production on a quality basis to link farmers up to a market where they can get a better price for their product and get out of coca production. But we're not going to do this forever. That's why we want the SCAA to help us."

Last year, Peru's coffee exports came to $396 million, making coffee the nation's most import export crop and accounting for 50% of all agricultural exports by value.Of the total, 50% went to Western Europe (primarily Germany), 30% to the United States and 20% to the Far East and elsewhere. By comparison, Peru's 1997 coca crop was valued at $100 million.

Roland Veit, president of Paragon Coffee Co. in New York, agrees that Peru offers real potential.

"In my opinion, Peru is a very important source of coffee, particularly at this ttime of year when Central America's washed arabicas are at the end of the crop and starting to get tired," he said. "In comparison, Peru's crop is in full swing, and Peruvian coffee provides a fresh character. Good Peruvian coffee provides the acidity that's lacking this time of year in most Central American countries."

Veit, who's also chairman of the SCAA's international relations committee, says most Peruvian coffee is commercial-grade, and ends up in blends.

"Coffees earmarked for the specialty coffee industry, such as organic, shade-grown, eco-friendly and other truly superior quality coffees, can easily fetch 20-25 cents per pound more. But the supply of and demand for these coffees is very limited, compared to the commercial market."

Among the advantages USAID says it can offer are "in-country contacts directly with farmers, assured quality, and potential for a coffee seal program clearly identifying two types of coffee -- bird-friendly and coffee from coca areas."

This first component of the Alternative Development program fosters voluntary coca reduction by improving access to basic services, supporting democratic structures and promoting broad-based citizen participation in local government. Results during the first two years of the AD Program include: training of 525 mayors, 1,289 councilmen, 1,407 municipal employees and 1,226 community leaders in a wide range of governance skills, and construction of 133 schools, 49 potable water systems, 38 health posts and 38 other community projects ranging from irrigation canals to wells. Some 27,000 families have benefited from these activities.

Accomplishments to date include the initiation of over $27 million in training, production and marketing assistance programs with NGOs for increased production on over 35,000 hectares (including coffee, 11,100 hectares; cacao, 6,100 hectares, annual crops, 9,750 hectares; agroforestry, 4,350 hectares, and palm hearts, 1,150 hectares).

The Alternative Development program is working in five geographic areas throughout Peru: Central Huallaga (Ponasa-Biabo-Sisa); Upper Huallaga (Tocache-Uchiza); Aguaytía; Pichis-Pachitea (Villa Rica) and the Apurimac River Valley. This encompasses 354,000 people in 41 districts and 1,527 communities, including 239 communities with signed agreements -- and another 219 expected by year's end.

A $14 million commercial credit program has been established with a local private bank for investment in alternative crops. Money is loaned at 36% to 48% a year, which is the market rate for microcredit.

"There have been real problems in Peru's agricultural sector with credit. People get the money and don't pay it back," says Maxey."So we're building a group of people that vouch for each other. It's really super, exciting stuff if it works."

Undergirding these productive activities is a 20,000-hectare land titling program, while a $1 million program has been established to help the subsistence farmers, and is currently working with 2,700 families. In addition, said Maxey, USAID has earmarked $4 million for environmental and conservation activities.

"We're having an internal debate," he explained. "One of the good things about coffee is that it's shade-grown. There's a big push in the government to go to row crops -- for example corn, soybeans and rice. While we're working on a smaller scale with rice in some areas, because of the environmental impact it's not something I see us pushing in a big way."

But is there a market for such coffee? Maxey and several independent surveys say yes. A recent Roper Starch Worldwide Report found that 78% of adults surveyed said they'd be more likely to purchase a product aligned with a cause they cared about than a comparable independent product -- and over 50% said they'd be willing to pay more for it.

Separately, a Walker Research poll found that 88% of respondents said they are much or somewhat more likely to buy from a company that is socially responsible.

Interestingly, Peru is South America's largest producer of organic coffee. That's because Peruvian farmers are too poor and too isolated to buy chemicals, says Hilary Abell of Equal Exchange, a non-profit organization.

"Peru has tons of organic coffee by neglect, and over the last few years they've become more pro-active by taking advantage of the organic market and certifying their coffee, whereas Colombia has been the opposite," she said. "In both countries, there's increasing interest in organic coffee, and most importers are willing to pay a premium -- about 15 cents a pound -- for organic."

Abell said Equal Exchange represents 3,000 members of Central de Cooperativas Agrarias Cafetaleras del Nororiente, a growers' cooperative in the northeastern Peruvian city of Chiclayo.

Nevertheless, Francisco Barrentes, a campesino federation leader, says his people have to be on alert "because the Shining Path and drug traffickers could always come back. Alternative development [to replace coca crops] is a slow process."

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