The Tea & Coffee Trade Journal / June 1997
By Larry Luxner
BOGOTA -- In 1959, fictional coffee farmer Juan Valdez was born, and in 1963, an aspiring young executive named Jorge Cárdenas Gutierrez joined Colombia's National Coffee Growers Federation -- the organization that created Juan -- as an assistant manager.
Nearly four decades later, Juan Valdez is still the centerpiece of cleverly designed ads for Colombian coffee (these days, he even has his own Web site) and Cárdenas is still with the Federation, having been appointed its general manager in 1982.
The veteran coffee official, who headed Colombia's delegation to the ICO and other international organizations, also serves on the boards of a leading bank (Banco Cafetero), a shipping company (Flota Mercante Grancolombiana) and one of Colombia's most important institutions of higher learning (Universidad de los Andes).
During a lengthy interview with The Tea & Coffee Trade Journal at his spacious Bogotá office, Cárdenas -- now 66 -- talked about his long career, about recent price swings and about the important role coffee has always played in the Colombian economy. -- now 66 --n 1982.ted its gene
"Colombia has a coffee culture over 100 years old which we must maintain. This industry generates 800,000 direct and 1.5 million indirect jobs. We obviously have an obligation not to let our position deteriorate," he said. "To avoid this, one year ago Colombia began restructuring its coffee program, looking, for example, for ways to lower production costs and increase yields."
As general manager of the Federation, Cárdenas ranks as one of the most influential figures in Colombia's coffee industry, considering that the organization he oversees easily controls 55-60% of Colombia's coffee production, and 40% of all exports.
"In the first three years after the breakup of the International Coffee Organization, coffee-producing countries could export 20 million sacks more than normal, and control was transferred totally to the importers. This has obligated us to revise all our coffee prices," Cárdenas explained. "In Colombia, the crisis was worse than in other countries, because of the broca disease, which covers 70% of the coffee-producing areas. Also, since 1991 our costs of production have increased by 30% because of the revaluation of the Colombian peso."
However, things are changing for the better. After a long period of depressed prices in the $1.43-a-pound range that left the National Coffee Fund about $150 million in the red, the world coffee market has turned completely upside down, and prices have since skyrocketed to $2.35 a pound. The reason: low inventory stocks around the world, and bad weather in leading coffee-producing regions such as Brazil and Central America as well as Colombia.
In fact, the Federation recently announced that total Colombian coffee production would amount to only 10.4 million 60-kilogram sacks. But according to Latin Trade magazine, "with a million sacks destined for the domestic market, coupled with the fact that some 520,000 sacks do not meet international standards, exports will only amount to 8.8 million sacks. That is significantly below Colombia's export commitments for this year."
Nevertheless, despite falling world production and reserves, higher prices can only mean welcome news for Colombian coffee growers.
"Prices in the last three months have doubled in relation to prices we had in December 1996," says Cárdenas. "There was a revival in prices which has obviously created optimism in the industry. The industry has had very low prices since 1990, and has had to organize itself to survive."
At the moment, Colombia has one million hectares of land planted with coffee trees; only Brazil devotes more land to the coffee crop.
In March, the Federation reported that 1996-97 Colombian coffee production would total 8.3 million sacks, down 2.1 million from its original 10.4 million-bag estimate made in December. But when the Federation later retracted that estimate -- returning to its original forecast -- prices fell and some commodity traders lost money. Those discrepancies are now the focus of an investigation by the Coffee, Sugar & Cocoa Exchange, which says it was compelled to look into the discrepancy because the Colombian estimate has such a significant impact on futures trading.
According to The Journal of Commerce, "for some people the real issue remains whether the estimate by the Federation, a political arm of the country's coffee industry, was a clerical error or an effort to push prices higher. While the latter is generally not considered a credible factor, it has been discussed privately."
One reason Colombia is so linked in the public mind with quality coffee is its inten-sive marketing campaign. Over the years, Juan Valdez has become one of the most easily recognized fictional characters in U.S. advertising history -- right alongside Joe Camel and the Energizer Bunny. Asked about Juan Valdez, Cárdenas has this to say: "There were two. The first was Cuban, and he died about five years ago. The other, for over 25 years, has been Carlos Sánchez, and he currently lives in Medellín."
Between 1988 and 1992, the Federation spent up to $60 million a year on Juan Valdez-related publicity; this year, the advertising budget is down to $23 million.
"We had to sacrifice many programs to be able to divert resources to our coffee producers," said Cárdenas, though he added that "Colombia got its market by promotion and very strict quality control. Colombia has too much regulation today. It has been very interventionist in the control of coffee. But thanks to this promotion and the market, today the position of Colombian coffee is very envious."
At present, Colombia accounts for 16-17% of world coffee consumption by volume, and 22% of world coffee by value. Domestic consumption comes to around 15% of total national production.
Yield, he says, is currently around 15 bags per hectare -- the same as most Central American countries. Colombia's disadvantage is in the price; only Costa Rica, with its progressive welfare system and relatively generous wages, has higher production costs than Colombia (about $260 a month).
In addition to coffee, the Federation has invested in a number of coffee-related businesses and ventures. One of them is Aerolineas Centrales de Colombia S.A. (known by its Spanish acronym ACES), an airline founded in 1971 as a "puddle jumper" serving passengers between the coffee-growing centers of Medellin and Manizales, and between Medellin and the capital, Bogota.
Currently, ACES is 54% owned by the Federation and 44% by the Flota Mercante Grancolombiana (which is itself 80% owned by the National Coffee Fund, and 20% by Ecuador's Banco de Fomento). The remaining 2% of ACES shares are owned by more than 500 individual stockholders.
In 1996, ACES' total revenues came to $170 million, with profits of $5.3 million. The airline operates 181 flights a day, and last year transported 1.2 million passengers.
"We're very closely associated with coffee growers who tend to own very small pieces of land," said ACES President Juan Emilio Posada Echeverri. "Most of them are not sophisticated, and most do not fly on the airline. But they have pulled their resources together and have made some very wise investments."
Now, the airline is doing so well it wants to take on a strategic partner -- with an eye towards eventually going public.
Posada says the airline's owners want to sell 30% of ACES stock in order to finance an ambitious expansion program. In fact, Posada recently hired a London-based investment firm, said to be a subsidiary of Germany's Deutsche Bank, to organize the private placement. Additionally, the airline "has access" to $300 million in financing, he said without elaborating.
"I wouldn't be surprised if some U.S. carrier bought a piece of ACES. With [Venezuela's] Viasa going down, we're hoping to get more destinations," Posada said, adding that "we will place the airline with the best strategic partner. We do not want undesirable stockholders."
On a national level, says Cárdenas, the current government of President Ernesto Samper is helping the coffee industry by providing roads, health and education services in coffee-producing areas, though he adds happily that "the state has no aspirations to participate in the coffee industry like before."
Recently, says Latin Trade, "the National Coffee Committee set up a mechanism which passes the extra income directly to the producers. It tied the domestic price paid to coffee growers directly to international prices quoted in New York. That was the best way to help the growers pay their debts, analysts agree." Improved prices will also help turn a worrisome deficit into a comfortable surplus; government sources say the National Coffee Fund should be $300 million in the black by year's end.
According to a March 17, 1997, report by Business Latin America -- which is published by The Economist -- "Colombia's agricultural sector grew 2.4% last year. Excluding coffee, which suffered a drop in production of 14.6% last year, agriculture grew 4.4%. The sector stands to expand further this year. In the last three months, Colombian coffee prices have more than doubled on world markets. And analysts say prices are likely to stay high for the rest of the year. That will spur growth in a sector that still accounts for approximately 10% of the country's exports."
Yet perhaps the biggest economic story in Colombia this year is decertification. On Feb. 28, the Clinton administration "decertified" Colombia's drug-fighting efforts for the second year in a row -- despite intensive lobbying by top Colombian business groups and their allies in Washington.
"The government of Colombia has failed to follow through on promised counter-narcotics action or to confront fully the drug interests that contributed millions of dollars to President Ernesto Samper's campaign," declared Assistant Secretary of State Robert S. Gelbard in justifying the decision. "There is as much cocaine coming into the United States as ever before, more heroin being produced than ever before. That's the bottom line."
Colombian businessmen fear that with decertification -- which lumps their country with such pariah nations as Afghanistan, Burma, Iran and Syria -- the U.S. government might later apply tough sanctions that range from revoking the landing rights of Colombian airlines to abolishing trade privileges for $400 million worth of flowers and other products covered by the Andean Trade Preference Act.
Curiously, however, the coffee industry isn't worried about this particular subject.
"Decertification has had no impact on us," says Cárdenas. "All world coffees have equal access to the U.S. market. We enter on the same terms as any other country. Colom-bia's three million sacks are indispensable to the U.S. market. The industry is sure of continuing to supply this market."
And despite increasing political violence in Colombia's banana-growing regions and a national homicide rate of 88 per 100,000 -- one of the world's highest -- Cárdenas says this doesn't have too great an impact on his industry either.
"Violence hasn't been that much of a problem," he said. "We don't have the problems of the banana industry. Things have been relatively stable and tranquil."
What does concern Cárdenas is the opening of new markets to Colombian coffee.
"We're trying to develop two markets," he said. "One is Eastern Europe/Russia, and the other is Asia. This year, Colombia was the biggest provider of coffee to Japan (1.2 million sacks). Brazil was No. 2. We also have a good position in Poland, Hungary and the Czech Republic."
Asked about the huge Chinese market, Cárdenas says "we're trying to conquer it city by city."
In fact, Colombian coffee growers are now competing with Switzerland's Nestlé and Maxwell House of the United States for market share in Shanghai, China's largest metropolitan area.
"Small packets of '3-in-1' Colombian instant coffee will be used to challenge Nestle and Maxwell products," said Ricardo Gutierrez, director of the Federation's Far East office. The '3-in-1' instant coffee is a mixture of pure Colombian coffee, sugar and Japanese powdered milk. The idea follows the 1994 launching of a $2 million joint venture in Zhuhai, in China's Guangdong province, involving the Federation, Japan's Mitsubishi Group and Hong Kong's Tsit Wing Group. Shanghai alone consumes 30 tons of roasted coffee a year. The venture provided the first 1,000 boxes of instant coffee -- each containing 480 small packets -- during the city's Spring Festival last February.