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Investors seek to revive Puerto Rico's once-famous coffee industry
The Tea & Coffee Trade Journal / August 1996

By Larry Luxner

SAN JUAN -- In the annals of Puerto Rican history, 1896 stands out as a vintage year for the island's coffee crop. In that year, according to Luis Pumarada O'Neill's La Industria Cafetalera de Puerto Rico: 1736-1969, the industry reached the pinnacle of its success, ranking as the world's sixth-largest coffee exporter and shipping a record 579,613 hundredweights (quintales) of locally grown beans to sophisticated coffee drinkers throughout Europe.

Today, exactly a century later, several brave entrepreneurs are trying to recreate Puerto Rico's once-famous image as the source of the world's finest coffee beans. Despite last year's drop in local coffee consumption to only 7.0 pounds per-capita -- the lowest in Puerto Rican history -- more connoisseurs both on and off the island are buying expensive gourmet coffee than ever before.

"People are caring more about what they drink, and they're willing to pay the price," says Julio Torres, vice-president and treasurer of Café Yaucono, the island's largest coffee producer. Torres estimates that his company -- with 1995 revenues of $35 million -- controls 65% of Puerto Rico's coffee market, followed by Caguas-based Garrido y Compañía Inc., whose Café Crema has a 20-25% market share.

In 1994-95, the Puerto Rican coffee crop weighed in at 340,000 quintales (worth $68 million). This year, according to the Commonwealth's Department of Agriculture, it's projected to drop slightly to 330,000 quintales. Nevertheless, coffee is still Puerto Rico's most important crop, outranking both sugar and bananas in value (around $43 million each) as well as mangoes, pineapples and papayas. The entire agriculture sector -- which includes dairy, poultry, livestock, fisheries and ornamental plants -- contributes $690 million a year (or only 3% of the total) to Puerto Rico's gross domestic product, far less than manufactur-ing, tourism or construction, and only a shadow of its once-glorious past.

Ironically, in recent years. the Caribbean island -- whose coffee in the late 19th century was the favorite of kings and popes alike -- has begun importing coffee from neighboring islands just to meet local demand. One reason is that Puerto Rico, where the U.S. federal minimum wage applies, simply can't compete with low-cost producing countries like the Dominican Republic without massive government subsidies.

In fact, the Puerto Rican government controls local coffee prices through the consu-mer agency DACO, whose current ceiling for retail coffee is $3.67 a pound. The local Department of Agriculture is also a buyer of last resort, purchasing beans at $2.43 a pound when the island's estimated 15,000 to 17,000 coffee farmers can't find other customers.

"The only way Puerto Rican coffee could have survived was with the intervention of government," said Jaime Fortuño, president of Escogido S.E., producers of the Yauco Selecto gourmet brand. He added that the current tariff on imported green coffee is around $2.50 a pound. "Now anybody who gets caught smuggling coffee into Puerto Rico can have their property confiscated, plus fines and jail terms."

Fortuño, brother of current Puerto Rico Tourism Secretary Luis Fortuño, is an ex-investment banker and a graduate of Harvard Business School. He and Torres, together with a trio of coffee growers -- Roberto Atienza, Miguel López and Ignacio Pintado -- launched Yauco Selecto in 1990 after hearing that Japan was interested in buying quality beans from Puerto Rico's southwestern coffee-growing region.

"Jamaica had just had a hurricane, and they were short of Blue Mountain. That's when we realized there was a market for high-priced coffee," Torres recalled in an interview. "At the time, the average world price was $80 a bag, though Puerto Rico had been much higher for many years. We used to export coffee, and we still had all the financial resources and knowledge."

The various parties pooled their skills and went into business, establishing three farms containing nearly 1,000 acres of coffee-producing trees -- mostly arabica, bourbon and tipica varieties. Coincidentally, their first shipment was to Barcelona, Spain, the same port that received the first bag of Puerto Rican coffee beans ever exported, in 1756.

This year, says Fortuño, a board member of the Specialty Coffee Association of America, Yauco Selecto should sell around 2,000 bags of gourmet coffee at an average $500 each. That translates into annual revenues of $1 million. Of the total, 80% is exported and 20% is sold locally (often at a higher retail price than what's shipped overseas).

"In 1995, our most important markets were Europe, the United States and Japan," said Fortuño, adding that Yauco Selecto is now cropping up in new consumer markets like Israel, where importer Michal Reiner of Haifa markets the Puerto Rican coffee in Hebrew-label bags for sale throughout the Jewish state. All told, Yauco Selecto is now available in about 20 countries.

"Ours is the kind of project where production costs dictate our marketing strategy," says Fortuño, 33, who points out that a good picker can earn $100 a day. "It's just like Hawaii in terms of labor costs. By growing our coffee in Puerto Rico, a U.S. territory since 1898, we operate with labor and production costs in line with the developed world. In simple terms, if we were in the shoe business, it would be as if we were manufacturing in Manhattan while Nike and Reebok were crafting their sneakers with the help of $3-a-day laborers in Malaysia."

According to Fortuño, who likes to show visitors a big, colorful scrapbook of his company's rise from obscurity to recognition, three things distinguish Yauco Selecto from quality coffees grown in Third World countries such as Guatemala, Ethiopia or Indonesia.

"First, our coffee is grown under strict environmental guidelines set forth by federal agencies as well as our very own practices. We strive to offer a product with a natural production, where water quality is preserved, and with serious consideration for our surrounding ecosystem," said Fortuño. "Secondly, our labor force receives the highest pay available in the coffee industry. We compete for workers with Eli Lilly and IBM. Children go to school, not to work in the farms. Third, ownership of Yauco Selecto remains close to the farm. The majority owners of our effort are the actual farmers."

Specific production or sales information isn't available from Fortuño's chief rival, Garrido y Compañía Inc., because of what company president José M. Rodríguez Garrido says is "a contract of non-disclosure with our customers that prevents us from revealing any sales numbers." Nevertheless, Garrido claims his gourmet coffee exports are slightly bigger than Yauco Selecto's 2,000 bags a year. (A third and much smaller company, Café Bigote de Abuelo Inc. in San Juan, sells fresh whole 100% arabica beans in sealed, 8-oz. foil bags for $13.95 retail, though the company doesn't appear to be a major player in the gourmet coffee market.)

In a recent interview, Garrido said his company -- which employs 160 people and registered 1995 sales of around $30 million -- has 203 acres of coffee trees in production at Hacienda Alto Grande, near the northwestern town of Lares. The hacienda was purchased in 1990 from coffee farmer Neftali Soto, now Puerto Rico's secretary of agriculture.

"Our whole process takes eight days, from the cherry bean to the finished product, and I believe there's no other company in the world that takes so long," said Garrido, 44, whose grandfather started the business around 70 years ago. "But it's not because we're lazy. It's a very time-consuming tradition that has resulted in consistent high quality. We do not use color sorters. After the coffee's been processed, we keep it in warehouses which are humidity- and temperature-controlled, with zero illumination."

In 1993, master taster Willy Pettersson of Sweden's Gavalia Kaffe -- one of the world's largest mail-order coffee catalog firms -- said his visit to Alto Grande "revealed not only exemplary high-grown coffee from small carefully tended farms, but one of the best contemporary processing facilities" he had ever encountered during his world search for fine beans. Besides Gevalia Kaffe, Hacienda Alto Grande coffee is also sold to J. Martínez & Co. of Atlanta, Hena Coffee Inc. of New York and Japan's Ueshima Coffee Co.

"We buy from small farmers that comply with our quality requirements," Garrido explained. "Gevalia is getting more than 50% of our production. They launched Alto Grande for their limited-edition Island Mountain Reserve program, which retails for $24 a pound. Alto Grande is also sold in Japan as a gift item in presentation packs."

Soto, the agriculture secretary, had to give up his coffee business upon assuming his post in January 1993 because of an ethics law governing possible conflict of interest. In a lengthy interview at his office in San Juan, he said the previous administration of Gov. Rafael Hernández Colón made a "big mistake" by importing coffee from other countries.

"Over 100,000 quintales of coffee was sitting in warehouses here, while we were importing 16,000 quintales a year from the Dominican Republic and Panama." By contrast, he said, the pro-statehood administration of current Gov. Pedro Rosselló has imported "not one pound of coffee, and still we have a surplus."

Soto says the Rosselló administration wants to encourage the growth of Puerto Rican coffee exports with the new agricultural incentives law. This piece of legislation, passed in December 1995, eliminates all tariffs on machinery and imported products (such as insecticides and fertilizer) used in agribusiness.

"The purpose is to lower production costs to farmers," he said. "This should help the coffee industry because, to begin gourmet coffee production you need a large amount of money, plus an investment in inventory. This law gives investors the opportunity to lend money to farmers, and even banks won't have to pay tax on the interest they gain from these loans."

Garrido agrees that better tax incentives will open up opportunities, adding that he hopes the law "will serve as an instrument for bringing new investments into agriculture."

In the meantime, says Yaucono's Torres, Puerto Rico is producing more coffee than it can sell. While government subsidies are crucial for now, he says, the industry's long-term future is in the specialty export market.

"Exports were lost for a long time, and people started losing the cariño to produce excellent coffee," he said. "Instead of drying beans in the sun, the government subsidized bateas which dried coffee in eight to 12 hours. Instead of picking red ripe cherries, they picked green and red. The industry lost its finesse.

"Still," Torres adds, we drink one of the best coffees in the world. The solution is to grow the coffee we used to grow, so that we can compete in the market for high prices."

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