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Ecuador's coffee industry aims to stay afloat
The Tea & Coffee Trade Journal / March 1996

By Larry Luxner

QUITO -- One of South America's smallest countries in size, Ecuador is nevertheless well-known as the world's largest banana exporter and the world's second-largest shipper of cultivated shrimps. It exports enough crude oil to have been a founding member of OPEC, and its canned tuna, cut flowers and frozen fish can be found in supermarkets and florist shops throughout the United States and Western Europe.

The nation known for its Galápagos tortoises, its quaint Indian villages and its towering Equatorial Monument used to be a famous coffee exporter, too. But the coffee industry's glory days appear to be ending, just as its once-famous cacao industry slipped into oblivion earlier this century.

Between 1894 and 1905, Ecuador was the world's largest cacao exporter. Its lush Pacific coastal area was ideal for the cultivation of cacao because of its special soil conditions, consistent rainfalls and extraordinary natural estuaries. The indigenous Teobrama Cacao Nacional was considered one of the world's finest cacao brands. Its export to major markets generated enormous profits, leading to impressive public-works projects throughout Guayaquil, Ecuador's largest city and chief port.

Nevertheless, cacao began declining in importance due to severe adjustments in the world market following World War I, and the growth of competition from Brazil and Africa, which elevated world production far beyond immediate demand. Finally, in 1916 the crop was threatened by the escoba de la bruja or "Witch's Broom" fungus, which wiped out entire plantations, and by the 1920s, the industry was in serious decline.

Last year, cacao exports brought Ecuador just over $70 million in revenues, down from $138.4 million in 1985. Likewise, green coffee and soluble exports generated $223.3 million in 1995, a sharp drop from 1994, when coffee brought in $413.8 million, according to the latest figures provided by Ecuador's Central Bank.

"Coffee has decreased in its importance to Ecuador's economy," said Patricio Izurieta Mora-Bowen, assistant secretary for economic affairs, during an interview at Ecuador's Foreign Ministry in Quito. "Ten years ago, we exported much more coffee, and 20 years ago, coffee was the most important crop. Since then, other countries have become more competitive."

Juan José Pons Arizaga, president of the Ecuadoran Federation of Exporters (known in Spanish as FEDEXPOR) says that although total value of exports rose from $3.84 billion in 1994 to $4.1 billion in 1995, there was no profit "because exchange controls caused the cost structure to eat up any possibility of profitability."

Added Hernán León Guarderas, executive director of FEDEXPOR: "Ecuador doesn't have a coordinated export strategy that promotes our exports. The private sector has long urged the government to adopt a new policy and a foreign trade law." He pointed out that "coffee obviously has a lot of difficulties because of international prices. The industry needs to renovate its fields and maintain the quality of Ecuadoran coffee, which is considered very high-quality."

Yet not everyone would agree with that statement.

One major coffee exporter, in an unusually blunt interview, said Ecuador's coffee is "bad" compared to Colombia's, though about the same in quality terms as Brazilian-grown coffee. He said the industry hasn't really declined yet in overall importance, because Ecuador still remains an agricultural rather than an industrialized country, with coffee employing roughly 300,000 of the country's 11 million inhabitants.

"We have very few big farmers and a lot of small growers who have one hectare of land, of which coffee is only a small part. They're also growing beans and fruit," said the exporter, who asked not to be named. "The disadvantage is that these people aren't technologically inclined. They don't have the money or knowledge, so the quality suffers."

In addition, there's very little use of pesticides or fertilizers, and because of the lower quality, washed and robusta coffees are sold at a 5-10˘ discount, while natural is discounted by 20-25˘.

Ecuador's chief coffee-growing regions are the coastal provinces of Manabí and Guayas, the mountain province of Loja and the jungle province of Amazonas. All told, the country has about 150,000 hectares of coffee under cultivation (compared to Colombia's one million hectares), with about 10% of total production -- or 200,000 bags -- consumed locally. The problem when it comes to exporting is that most of the country's coffee is grown along the coast, where it's too hot and dry to produce high-quality beans, while the high-altitude coffee grown in Loja is too far from Guayaquil to be exported competitively.

In 1995, Ecuador's top five green coffee exporters were Grupo Noboa's Ultramares S.A., which shipped 14.9 million kilograms worth $35.2 million, followed by Cafedor S.A. (13.7 million kgs worth $33.8 million); Exportadora González (10.7 million kgs worth $23.1 million); Freddy Bustamante (6.05 million kgs worth $15.3 million) and Benogusa S.A. (5.1 million kgs worth $13.0 million). The total of the 53 exporters on the list came to 80.47 million kgs worth $191.6 million.

The top five buyers of Ecuadoran coffee were Folgers ($23.8 million), Rothfos Corp. ($16.7 million), Armenia Coffee Co. ($16.1 million) and Volcafe ($12.3 million).

In 1994, Ecuador's top exporters -- in descending order -- were Cafedor, Exportadora Ontaneda (which declared bankruptcy late last year), Ultramares, González and Cafimgo S.A., while the top buyers were Rothfos, Louis Dreyfus Coffee, Gollecke-Rothfos and Armenia. Three European countries -- Germany, Holland and the United Kingdom -- buy around 50% of Ecuador's soluble and 30% of its green coffee production. Most of the remainder goes to the United States.

Joseph Massoud, commercial director of Ultramares, said that "coffee really hasn't been a good business in general for the past four years," and that 1994 was a miracle for Ecuador because of the frost in Brazil, which pushed prices way up.

"Ecuador is one of the very few countries in the world that produces the whole range of coffees," Massoud explained. "Robusta is grown along the coast or in the jungle. Arabica coffee grows better at high altitudes and it needs special care, which this country never has had. In Colombia and Central America, they have machines to wash the beans. Here it's done in a very artesanal way. One reason is that production is very limited to two or three months a year, while Colombia has two crops."

Massoud, interviewed recently at his office in Guayaquil, was born and raised in Lebanon, then moved as a teenager to France, where he was educated. Later, while studying for a master's degree in business administration at New York University, Massoud landed a job at a French sugar trading firm, where he realized that the role of an intermediary was becoming more and more difficult.

"I thought the future was to go to the origin, to participate not only in the trading but also in production," he said. "That way, you know the industry and can serve it better."

Massoud, who arrived in Ecuador three years ago, said Ultramares buys coffee from intermediaries, cleans it and decides what to export and what to use for soluble. The company's soluble division, Elcafé S.A., has two processing plants -- one in Guayaquil and one in Manta.

Without a doubt, the two biggest headaches for coffee exporters in Ecuador are high interest rates and the country's severe energy crisis. A brief border war with Peru last year cost both countries an estimated $1.5 billion, while political scandals at home kept investors away. In addition, the lack of rainfall combined with years of mismanagement has crippled the country's hydroelectric plants, which supply 70% of Ecuador's energy. As a result, Quito and other cities have been left in darkness up to nine hours a day. A controversial measure to sell off 39% of Ecuador's state-owned electric utility Inecel is virtually assured of passage, but observers don't expect it to have much impact in the short term.

"We have two plants, for which we have our own generators. We have to run them all the time, otherwise we would go bankrupt," said Massoud, adding that when it comes to financing, "we're lucky to have multinational backing so we can borrow at better rates, but we also have higher overhead."

On May 19, Ecuadorans will go to the polls to select a new president. Veteran politician Jaime Nebot of the Partido Social Cristiano (PSC) seems to be the clear favorite, with recent polls giving him 35% of the ballot. Nebot, who's blanketed the Ecuadoran countryside with his big blue-and-yellow campaign signs, is far ahead of his closest rivals, Abdala Bucaram of the Guayaquil-based Partido Roldosista Ecuatoriana (PRE) and Rodrigo Paz of the Quito-based Democracia Popular, each with 11% to 14%. Also in the race is former air-force chief Frank Vargas and independent candidate Ricardo Noboa, a member of the same family that owns Ultramares.

Although the coffee industry's decline hasn't been a campaign issue, exporters are watching the race closely. In March 1995, President Sixto Durán-Ballén -- who can't run again -- instituted a 2% government tax on exports in order to reinvest the money in the coffee industry through the Consejo Nacional Cafetalero. This entity (known by its Spanish acronym COFENAC) was created basically to educate farmers and extend easy credit to those in the industry. Another policy decision taken by the government in order to help push up world prices was to limit exports to 1.5 million bags during the 1995-96 season -- compared with traditional exports of well over two million bags.

Whether that will have any real effect remains to be seen. On the other hand, a resolution of Ecuador's energy problems could make its coffee industry more efficient, thereby translating into better prices and higher profit margins over the long run.

"Relatively speaking, Ecuador is politically stable. Once the energy crisis is overcome, we'll be able to move forward," Massoud concluded. "Ecuador doesn't have the dynamism of Colombia or Peru, but it has more stability."

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