Coffee industry poised for growth.

For years, Venezuela's Fondo Nacional de Cafe (Foncafe) has occupied a spacious office on the 17th floor of the 56-story Parque Central Este skyscraper in downtown Caracas--less than a block from Los Caobos, a former coffee plantation.

Granted, the government office is nowhere the size of the Ministry of Energy and Mines, which occupies most of the other floors of this steel-and-glass tower. Ever since the end of World War I, coffee has taken a back seat to the nation's powerful petroleum industry.

But with the recent breakup of Foncafe's monopoly on prices and exports, some here predict Venezuela could recapture its 19th-century fame and once again become a major exporter of quality coffees.

Last year, Foncafe, an autonomous institution within the country's Ministry of Agriculture, lost its power to regulate the Venezuelan coffee industry, allowing producers to export directly for the first time.

Ricardo Antonio Menendez is vice president of Grupo Afiliada CADA, whose Procafe subsidiary is among Venezuela's leading coffee producers. He says Foncafe's glory days are over.

"Procare initiated the destruction of this cartel," he said. "We're risking shareholders' equity to make money. If this is a democracy and an open-market economy, why should we accept government cartels?"

Menendez says that Foncafe, rounded in 1975 in order to protect coffee prices and control speculation, has outlived its usefulness and should be disbanded completely.

"In the last 20 years, nobody has invested one dollar in planting or replenishing their plantations," he said. "This is a paradox, because we have one of the best Arabica coffees in the world." At present, coffee is produced in 18 of Venezuela's 20 states, and provides a livelihood for more than 500,000 of the country's 20 million inhabitants.

Legend says the Venezuelan coffee industry got its start sometime between 1730 and 1732, when Spanish missionaries introduced the first coffee seeds in the region of Ciudad Guayana.

In 1783, a Presbyterian missionary named Pedro Ramon Palacios y Sojo built Hacienda La Floresta, the first coffee plantation, in Aldea de Chacao (a bronze plaque in Chacao's town square commemorates the planting of those first seeds). Cultivation of coffee rapidly extended to the states of Miranda, Aragua, and Carabobo.

From 1786 through 1788, coffee exports totaled 700 sacks. By 1918-- the last year of World War I--annual exports had jumped to 1.37 million sacks. But only three years later, it had dropped to 662,000 sacks; the country's economic priority had already shifted to petroleum.

In 1940, Venezuela--a signatory to the Latin American Convention in Washington--received a basic export quota of 420,000 sacks for the U.S. market and 606,000 sacks for shipment outside the U.S.

Nevertheless, by the 1970s, coffee was practically forgotten as oil prices skyrocketed, transforming Caracas into a glittering metropolis of five million and Venezuela into the wealthiest nation in South America.

Today, Venezuela produces between 65 million and 70 million kg of coffee a year, worth some $160 million on the world market. Of that total, only about 20% is exported.

"Up until now, there's been no stimulus for investing in anything," Menendez said. "Now, with the opening of the [coffee market] and the Venezuelan economy, we are looking for partners to invest in the coffee industry. We've had extensive conversations with U.S. companies that could place our coffee in markets abroad."

Menendez estimates there are some 135 coffee producers in Venezuela, including 15 large ones. According to the Caracas business magazine Gerencia 500, Venezuela's No. 1 coffee producer is Cafe Fama de America. Founded in 1927, it has 170 employees and an estimated 38% market share. Annual sales are Bs. 2.5 billion (about US$31 million at 1992 exchange rates). The company says its strengths are "quality products and service, fair prices, and optimal distribution channels."

In second place is Cafe Madrid, founded in 1958 and owned by Avelino Gonzalez Martin and Francisco Perfirio. It has 145 employees and an 18% market share. Sales are around Bs. 1.2 billion ($15 million) and 5% of its production is exported. The No. 3 producer is Cafe Imperial. The company, owned by Inversiones y Valores Industriales S.A., was rounded in 1926, has 95 employees and 1992 sales of Bs. 667 million ($8.4 million). The company cites its "track record of 67 years in the national market" and says its most important decisions have been "to orient the market towards exports, promote a policy of vertical integration, and implement novel distribution schemes."

In fourth place, says the magazine, is Procafe de Venezuela. With 56 employees, the company has been in business since 1960 and has been exporting since 1992. Its Tazita and E1 Penon brands come in packages of 40, 50, 100, and 200 grams, while its 500g size is available either in bricks or foil-wrap packages, and vacuum-packed cans in 500g and I kg sizes. While its share of the Venezuelan market is only 10%, it has focused on exports, which now constitute 20% of its estimated Bs. 650 million (US$ 8.1 million) in annual sales. "Brand preferences are very much aligned with tradition. If one brand is seen to be punished by another brand's promotion, its share will never drop by more than 1%," Menendez says.

The biggest opportunity for growth in the future is in exports, not those monopolized by Foncafe, but instead those promoted by the private sector. The opening of the socialist bloc, for instance, allows companies with large installed capacity to sign a contract to export coffee to Russia. If the state decides to totally deregulate the sector, we are sure that Venezuela will attract many foreign investors ready to form joint ventures with local companies and expand planted acreage."

Menendez said Procare is already exporting coffee to Canada, the U.S., and the Apollo cruise-ship line. It has also won contracts to ship coffee to Portugal, Italy, Russia, and the nearby island of Curacao.

"I think coffee exports have grown slowly and quietly," he said. "Many producers are being approached by international roasters." In the meantime, he says, Foncafe is dying a slow death. "It's the end of their life unless something dramatic happens in this country, and we return to a subsidized or regulated economy."

He added: "One very bad signal we've received has been the appointment of Hiranm Gaviria as agriculture minister. This man is known to favor subsidizing and protecting the industry." Unlike its neighbor to the west, Colombia, which has developed a worldwide reputation for quality coffee, Venezuela has never really promoted its coffee. The reason, Menendez speculates, is that the Colombian equivalent of Foncafe, the Federacion Nacional de Cafeteros, is not a government organization but a private association.

"Foncafe's only purpose was to regulate prices and, to some extent, finance the producer. What happened was, Foncafe exported the coffee and had to go in debt to pay their producers."

He adds that following Venezuelan economic reforms in 1989, "The coffee sector was the last sector to open, and very reluctantly. The country realized it needed the outside world as much as the outside world needed us. The two-tier exchange rate disappeared, and we went to Foncafe, it was very difficult. We created an internal rebellion and worked to gain support from other companies and through the Asociacion Nacional de Industriales de Cafe (Anicaf)."

Now, however, it appears that Anicaf is in trouble too.

In November, Venezuela's anti-trust agency, the Superintendency for Promotion and Protection of the Free Market (Pro-Competencia) announced it would investigate the coffee industry for allegedly forming a cartel to fix prices. Pro-Competencia Superintendent Julia Jatar said there were indications Anicaf had fixed prices of both beans and processed coffee, according to a report by the state news agency Venpres.

Jatar was quoted as saying that Anicaf apparently pressured coffee roasters to fix prices of the beans sold for raw material.

The future of Venezuelan coffee policy may in large part hinge on who wins the country's Dec. 5 presidential election. In the meantime, Menendez said possibilities for growth among Venezuelan coffee producers and roasters include flavored coffees (rum, canela, anis, etc.) for export, since in Venezuela there's very small demand for this. He also is calling for "more vigilant border and customs controls to prevent the illegal entry of Venezuelan coffee."

Larry Luxner, a freelance writer, resides in Puerto Rico.