Sweet and Sour.

While Argentina's sugar industry languishes, its lemon industry flourishes.

AT FIRST GLANCE, IT'S HARD TO BELIEVE THAT THERE'S AN agricultural renaissance under way in the impoverished Argentine province of Tucuman.

Sugar, once the mainstay of the local economy, is in crisis. This year, there were even doubts about whether plantation owners would be able to raise the money to harvest their crops. The province, with 1.1 million inhabitants, suffers a 19.2% unemployment rate, the highest in the country. In August, on the streets of its capital city, the police fought pitched battles with provincial government employees who had not received their wages for three months.

But despite appearances, Tucuman is potentially a land of plenty, with a subtropical climate, good irrigation, cheap labor and famously fertile soil. "Place a staff in the ground and it will sprout roots," Nicolas Avellaneda, a 19th-century Argentine president, boasted of his native province.

While sugar provides a graphic example of the decline of old-fashioned agricultural production, booming citrus production is demonstrating what can be done with slick modern techniques.

The sugar industry, which traditionally accounted for more than 10% of the regional economy, has tanked, thanks to depressed world prices and high costs of production due to dated techniques. Says Carlos Paz, provincial minister of production, "By applying technology we could be very competitive."

For an example, Paz need point no further than the local lemon business. Starting from virtually nothing a couple of decades ago, Tucuman has become the world's most important lemon-growing area, responsible for around a fifth of world production. Local producers hope that will serve as a springboard for local agriculture and the province as a whole.

Leading the citrus boom, agro-giant San Miguel has shown what local agriculture can achieve, having grown to become possibly the world's largest lemon producer and exporter, responsible for one in 12 of the world's lemons.

That's a long way from its origins in 1954, when the company was founded by Isabel Mata, owner of a general goods store, with orchards received as payment from clients who could not settle their accounts. By 1993, the company was generating annual sales of US$28 million. But growth had peaked, and it faced mounting losses.

Enter U.S.-owned multinational Continental Grain, which had scouted the property as a potential acquisition target. The foreign company declined to buy, but two of its executives--Alberto Ravazzola (who died in 1997) and Fernando Oris de Roa--were sufficiently impressed to take on San Miguel themselves.

After purchasing a major lemon supplier and an industrial plant to concentrate and expand processing capacity, San Miguel began trading on the Buenos Aires stock exchange in 1997. Last year, it registered sales of $82 million and profits of $10.7 million. "It was done with all the same people," says Fernando Seoane, the company's assistant managing director. "We just needed management."

"A food factor." Under that new leadership, the company has so far invested more than $75 million and will spend over $20 million more over the next two or three years, mainly from cash flow.

Almost a third of the money is for new processing capacity. The bulk, however, is spent at the orchards to boost production and improve yields. San Miguel's nursery includes samples of every known variety of lemon in the world, providing the raw materials for experimenting with new varieties and techniques. The attention to detail is clear at Montegrande, the largest of the company's orchards, where the trees are arranged in neat lines, with well-tended grassy paths between them. "This is a food factory," explains Sebastian Torres Posse, a company agronomist.

Unlike the local sugar industry, Tucuman's lemons are largely destined for the international market, with more than 80% going for export.

As production continues to swell, San Miguel's new owners have had to look for new markets, including Russia (which now accounts for 10% of overseas sales), Hong Kong, Poland and Spain. "The challenge for the future is to enter new markets like the U.S. and Japan," Seoane says.

That has so far proved more easily said than done. Argentina expects to finally tie up a deal with the U.S. sanitary authorities this year and hopes for admission to Japan by 2002. But the prospect worries competing growers, particularly in the United States, where production costs are considerably higher. After intense lobbying, the United States has refused admission to Argentine lemons, ostensibly because of the possibility of importing Mediterranean fruit flies or diseases like canker and black spot.

In response, private companies throughout northwestern Argentina have for the past five years funded a $1 million-a-year scheme to eradicate obstacles to exports. The Argentines are also keen to reach a deal with major U.S. producers, like the Sunkist cooperative, to avoid conflict.

Of the world's five principal lemon producers, only Tucuman lies in the Southern Hemisphere, and its growers are looking to export to the United States mainly during its off season, from June to August. With Argentines accounting for over a third of the counter-season output, agronomist Torres Posse argues that they can complement rather than compete with their Northern Hemisphere counterparts. "There are new markets like China that the Californians can't satisfy alone," he reckons. "We want to work with them to supply those markets all year round."

As production continues to boom, however, even those at San Miguel agree there may be limits to how many lemons the world will buy. The company currently produces 90,000 tons of fresh fruit and processes another 290,000 tons for industrial use in soft drinks (the local Coca-Cola plant is one of its biggest customers), pharmaceuticals and cosmetics. It will need to find still more buyers, as it plans this year to add another 50,000 trees to the 1.2 million it already has. What's more, a third of its orchards are under five years old and have yet to reach maximum production, and the company is also replacing older trees with higher-yielding varieties and experimenting with dwarf lemon trees to increase per-acre yield.

Tucuman as a whole produces 900,000 tons, which Seoane thinks will rise to 1.1 million tons in the next three years. "We could grow even faster, but world prices are already falling," Seoane says. "The lemon is more of a condiment than a fruit, [and] demand is relatively inelastic."

As a result, San Miguel is looking to diversify by investing in other fruits, both in Argentina and elsewhere in Latin America. In May, the company took its first major step out of lemons, buying a 33% stake in Citricola Saltena, a major Uruguayan mandarin-orange producer. It plans to use the same transportation system, suppliers and work force.

"More than lemons, we are selling a service," Seoane says. "Our customers say, 'Why don't you send us oranges, pears,' and so on." For Tucuman's recovering agriculture sector, that is a plum prospect.