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Protectionist Puerto Rico struggles to rebuild coffee sector
The Tea & Coffee Trade Journal / October 2001

By Larry Luxner

The Puerto Rican city of Caguas, nestled in the mountains half an hour's drive south of San Juan, isn't known for much -- though it does happen to be the home of Puerto Rico's two largest coffee producers: Grupo Jiménez and Garrido & Compañía.

And nearly three years after its destructive visit, both companies are still struggling with the aftermath of Hurricane Georges.

"Without a doubt, the hurricane destroyed more than a third of our coffee crop," says Julio Torres, executive vice-president of Grupo Jiménez, the island's biggest coffee producer.

Torres, interviewed in Caguas a few months ago, said that "before Georges struck in September 1998, our crop was around 300,000 quintales (hundredweights). Following the hurricane, it was only 70,000 qq. Government insurance paid for 60% of the damages, but they took too long to serve all the insurance claims, even more than a year in some cases."

Industry officials say that Georges, which swept through Puerto Rico with winds as strong as 110 miles per hour, caused $97.7 million in crop and infrastructure damages to the coffee sector.

By 2000, Puerto Rico's total coffee crop had risen to 140,000 qq, which at the government-set subsidy price of $243/qq would translate into a cash value of $34 million. Industry leaders predict the crop will reach 200,000 qq this year and could reach 300,000 qq by 2002.

Grupo Jiménez, the industry leader, reported revenues of around $70 million last year. The company's leading brand is Café Yaucono, which enjoys an islandwide market share of 47%, followed by Café Rico, which has a 20% market share. A third brand, Café Rioja, has a 3% share, while the group's fourth brand, Yauco Selecto, is geared strictly for exports.

Joe Ricci is general manager of Garrido & Compañía. He says his company's main brand, Café Crema, has 20% of the Puerto Rican coffee market, and that Garrido has annual revenues of $30 million. He refused to disclose profits, saying only that "we're not going to be in the red." About 15% of total sales consist of in-office coffee service, and most of the remaining 80% is derived from domestic sales of Café Crema. Only a very small percentage comes from premium coffee-bean exports.

Ricci said the company has 150 employees throughout the island, one-third of them in Caguas. The company's owner is Suiza Foods, which purchased it from the Garrido family in 1996 for an undisclosed amount.

Both Torres and Ricci agree that the remaining 10% not dominated by Grupo Jiménez and Garrido is split among Café Coquí, Café Luri, Café Borinquen and other smaller brands.

Interestingly, Café Rico was originally produced and sold by a group of coffee farmers known as Cooperativa Cafeteros de Puerto Rico. In its heyday, Café Rico was the island's leading brand, with more than 50% market share. During the 1930s and 40s, it was the top Puerto Rican coffee exporter, selling mostly to Europe.

In 1982, according to San Juan-based newspaper Caribbean Business, Cooperativa Cafeteros de Puerto Rico's financial problems became so serious that the company was sold to a group of shareholders, who promptly renamed the company after its best-selling brand, Café Rico.

"Even though the product's name remained on top, the new owners were forced to start the company from zero as a roaster and distributor," said Torres. The company's roasting and southern regional distribution operations are still based in its birthplace, Ponce, "where our coffee is No. 1," he said. Grupo Jiménez distributes 60 coffee and coffee-related products, including three canned spinoffs: Café Rico Espresso, Café Rico Decaf and Café Rico 50/50 -- which is 50% regular coffee and 50% decaffeinated.

The latter, says Torres, "is for coffee drinkers who have been told to avoid caffeine, but who want to cheat a little."

All told, Grupo Jiménez has 125 employees, including a sales staff of 50 and a distribution fleet of 65 vehicles. Clients include large and medium-sized supermarket chains, grocery stores, cafeterias, restaurants, bakeries and hotels.

"The demand for coffee is around 315,000 quintales, and this year's crop is under 200,000 quintales," said Torres. "We make up the difference by buying on the international market through the government, because coffee is a protected industry here."

Jorge F. Sanders, executive director of the Coffee Roasters Association of Puerto Rico, said in an interview that the Puerto Rican consumer pays $3.64 per pound of coffee at the retail level -- a price set by the local government consumer-protection agency DACO in order to protect local farmers. The Commonwealth's 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.

"From 1991 until Hurricane Georges hit in September 1999, Puerto Rico had been producing all the coffee it consumed," he says. "Obviously, this changed with the hurricane. In February 2000 we began importing coffee."

Sanders says coffee is the only product that pays a duty upon entry into Puerto Rico, even if it's coming from the U.S. mainland.

"In 1931, Congress gave Puerto Rico the power to establish duties on imported coffee," he said. "Even when Puerto Rico became a Commonwealth in 1952 and when NAFTA was passed in 1993, this provision wasn't affected."

Sanders, whose organization has eight member companies, explained that the purpose of this law is to protect Puerto Rican farmers.

"That's why we still have a strong coffee-growing industry, because the prices are on average two and a half to three times the world price. Right now, it's four times the world average," a situation which Sanders concedes is "good for the grower, but not for the [Puerto Rican] consumer."

Asked why coffee is still regulated, Torres says it's "in order to maintain the coffee industry in Puerto Rico, especially in the 16 mountain towns for which coffee is the main source of income. Due to the federal minimum wages, we cannot compete worldwide. That's why we have an import duty authorized by Congress in order to defend the Puerto Rican coffee industry."

According to government statistics, coffee exports accounted for less than 1% of total coffee production by volume, bringing Puerto Rico about $1 million in revenue.

Ironically, in recent years. the Caribbean island -- whose coffee in the late 19th century was the favorite of kings and popes -- has begun importing coffee from Costa Rica, the Dominican Republic and elsewhere just to meet local demand. Sanders explains why.

"These days, Puerto Rico cannot compete cost-wise with Costa Rica, Guatemala or Ethiopia," he said. "Federal laws govern our island. We have to pay a minimum wage of $5.15, later going up to $5.75 an hour. We also have to pay social security and other benefits. And.all the fertilizers and materials we use are more expensive than in other countries. In Costa Rica, which is a well-developed country at this moment, they pay the coffee picker about $1 per 28 pounds of cherries. This past year, Puerto Rico was paying more than $4. How can you compete? And Costa Rica is one of the most developed countries."

"Asia, which was going to be the biggest coffee client in the world, is starting to become one of the biggest growers," he continued. "Vietnam and other countries have ventured into the coffee business, and their costs are even lower than that of Colombia."

Says local business executive Jaime Fortuño: "The only way Puerto Rican coffee could have survived was with the intervention of government. Now anybody who gets caught smuggling coffee into Puerto Rico can have their property confiscated, plus fines and jail terms."

In 1990, Torres and Fortuño, along with a trio of coffee growers -- Roberto Atienza, Miguel López and Ignacio Pintado -- launched Yauco Selecto 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 inter-view. "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 1,500 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.

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 quintales of locally grown beans to sophisticated coffee drinkers throughout Europe.

Today, more than a century later, several brave entrepreneurs led by Grupo Jiménez and Garrido & Compañía are trying to recreate Puerto Rico's once-famous image as the source of the world's finest coffee beans. Despite record low world coffee prices, more connoisseurs both on and off the island are buying expensive gourmet coffee than ever before -- as evidenced by the fact that Jamaica's Blue Mountain is going for $80 a pound on the Tokyo retail market.

"People are caring more about what they drink, and they're willing to pay the price," says Torres, who says the United States accounts for half of Yauco Selecto's export market. The remaining 50% of coffee goes to Italy, France, Great Britain, Japan, Israel, New Zealand and Iceland.

According to Torres, Harrod's of London recently chose Yauco Selecto as one of eight coffees to be listed in its coffee bar as Rare Estate-Grown Coffees. In addition, New Balducci's of New York uses Yauco Selecto to headline its Estate Coffee Section. At the same time, The Wine Spectator has chosen Yauco Selecto as one of the world's top 10 coffees, while Salvador Sans, roaster to the king of Spain, recently selected the brand for his Les Must Collection, along with Jamaica's Blue Mountain and Hawaiian Kona.

Over 100 inches of rain per year make the land ideal to grow the arabic trees of the borbón and porto rico varieties to produce Yauco Selecto.

Garrido & Compañía, meanwhile, has just over 200 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, a former Puerto Rico secretary of agriculture.

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.

Yet Ricci, Garrido's general manager, concedes that his main competitor, Grupo Jiménez, in recent years "has been more successful than we have in keeping the pipeline full" of premium Puerto Rican coffee.

"Basically, our market for Alto Grande -- our super-premium coffee brand -- was focused on Gevalia and Japan's Ueshima Coffee Co. We used to sell them beans, and they'd sell under private labels," Ricci told The Tea & Coffee Trade Journal. "When the hurricane hit us, the harvest was no longer available, and once it became available, we've never been able to get the quality of the crop back to the standards that the Japanese and Gevalia demanded.

"Yauco Selecto dedicated their time to exporting to markets in Europe, and we did not," Ricci conceded. "Our strong business was in selling green beans of the best quality to Japan. Therefore, when the hurricane hit, it hurt us more, because we didn't develop our Alto Grande business as they did their Yauco Selecto business. Ueshima will only buy very large and uniform beans, and after the hurricane that wasn't available."

Unlike Alto Grande, said Ricci said, Yauco Selecto is sold as ground coffee, "which does not require that the bean be of a specific size. They don't export beans, they export the brand." On the other hand, "we have an additional business that they don't have, since we have two mills in Lares to dry and process the coffee. We buy directly from the farmers, while they buy their beans from a consortium."

Torres says Grupo Jiménez recently inaugurated a new 300-acre farm, Hacienda Caracolillo, in the mountain town of Maricao. Its farm in Yauco, Hacienda Juanita, was left without a single tree in the aftermath of Hurricane Georges, though another farm, Hacienda San Pedro, was luckier, and managed to keep Yauco Selecto in the world market for the past two years.

Early last year, the Puerto Rico Department of Agriculture decided to shell out an additional $8 million to revitalize the sagging coffee sector, in addition to the $22 million already authorized. That gave the island's 3,000 coffee growers an additional $1,300 per each new acre of land cultivated for coffee.

Under the project, the agency will also encourage the cleaning of coffee plantations -- of brush, weeds and old growth -- by paying farmers $50 per cleaned acre. The aim is to have 3,000 new acres of coffee crops and 20,000 acres of cleaned plantations within 12 months.

At the same time, the Agriculture Department has been attempting to create a regulatory board to restructure the island's coffee sector -- a move backed by some 15,000 coffee producers, retailers and small coffee processors. The eight-member board was intended to benefit the coffee sector by re-evaluating and proposing new government incentives, as well as gathering funds for research and marketing strategies and promoting the use of environmentally friendly growing techniques.

However, the idea has been and continues to be opposed by Sanders of the Coffee Roasters Association of Puerto Rico.

"They have threatened to take the Agriculture Department to court if it moves one more step forward in empowering the board," said Pedro Engochea, president of the Farm Bureau's Coffee Sector. He added that "they think they can continue monopolizing the industry as they have been doing."

But Sanders, explaining that the issue is now before the courts, says that the board -- first proposed by former Gov. Pedro Rosselló -- is totally unnecessary.

"What the coffee sector needs most right now is immediate assistance, not the establishment of a regulatory board," he said. "To recuperate our coffee farming we don't need new bureaucratic entities. What we need is the political will to enact all of the available resources in favor of the sector."

Added Torres: "We were totally against regulating the coffee crop. It would have given the government power to tell the roasters where to sell their coffee." He noted that the Popular Democratic Party, which opposes statehood for Puerto Rico and is currently in power, has adopted a "socialist" outlook when it comes to the coffee industry.

While government subsidies are crucial for now, says Torres, 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 told us. "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 has 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."

Torres says the specialty market in Puerto Rico comprises less than 1% of total coffee consumption.

To promote premium coffee consumption among the domestic population of 3.8 million, Grupo Jiménez been running a TV media campaign targeted at turning young Puerto Ricans into coffee drinkers. Some of the commercials promote cold coffee -- in the form of piraguas, or snow cones -- at special events.

It has also begun offering a "coffee school" at the Santurce facilities of Café Yaucono. Courses run Mondays, Tuesdays and Wednesdays in the mornings and afternoons, and students pay $150 apiece for a seven-week course.

Nilmarie Jimenez Picó, vice-president for special projects at Cafe Rico Inc., says the classes cover the history of coffee from its discovery in Ethiopia until its arrival in the Caribbean, and the glory days of Puerto Rican coffee exports. Sanders teaches about coffee in the 20th century, and how the introduction of technology has changed the industry.

Other classes teach participants how to tell the difference between types of beans, grading, roasting and aromas. Next is a class on how to make a good cup of coffee, basic espresso, cappuccino, cold coffee and coffee in recipes, and the use of coffee machines.

"We teach about the history of coffee, and how to brew a good cup of espresso," says Jiménez Picó. "We have a relationship with the Hotel School of Puerto Rico, and we're trying to get every student from that school to go to our coffee school as well. We also teach the whole proceess from the farm to the roaster, and the basics of cupping. On the last day of school, we go to a coffee farm and show the whole process from beginning to end."

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