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Central America suffering from low coffee prices.

Central America suffering from low coffee prices

The approaching 1989/90 coffee harvest in Central America is being viewed with little enthusiasm after the collapse of the International Coffee Agreement (ICA) last July, according to the Financial Times.

With average prices down more than a third from their levels a year ago the five coffee exporting countries of the region stand to suffer a fall of 10 percent in their foreign exchange earnings next year.

The effect would be the same if the European Community decided to suspend all its economic aid to the region. Looked at another way Central America's $400M trade surplus with the EC in 1988 has been effectively wiped out as a result of the ICA's demise.

We have to keep running just to stand still," said a disenchanted producer in Nicaragua, summing up the frustration of producers, exporters, politicians and bankers.

Coffee production is the key wealth creator in Central America, underpinning the economic health of each of the region's five countries. It creates employment for a significant part of the population, is the biggest single generator of much-needed foreign exchange, provides taxation income for tightly-pressed government budgets and is a major user of bank credit.

Liquidity crises in the coffee sector can produce liquidity crises in the banking system. Then inflationary pressures can build up each country's economy as banks are forced to restructure rural loans with government assistance.

The main impact has still to be felt. Most of the 1988/89 harvest was sold before the ICA collapse. The crunch will come next year as the 1989/90 harvest is marketed, said Jose Aguerri, a senior economic adviser at ENCAFE, Nicaragua's marketing board.

"We expect a drop of $25M to $30m on the past season's exports of $100 million, and that is even including the likelihood of greater sales now that quotas have been removed," he said.

Losses on a similar scale are being projected for the other Central American producers. With annual exports of about 10M 60kg bags, they supply about half the world market for the so-called "Other Milds" Arabica coffees. Total exports in 1987 from Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica amounted to $3.88bn, to which coffee contributed an estimated $1.25bn. A 30 percent drop on that level will signify a fall in exports of $375mn, or a 10 percent fall in total export earnings.

Next year imports will have to be cut and social welfare programs reduced. Every Central American will most likely feel poorer.

Costa Rica, which holds stocks of coffee estimated at 1M bags, might be able to offset some of its losses by substantially greater sales in the coming year, but once stocks are cleared the perspective remains discouraging as long as prices remain depressed.

With the exception of Nicaragua most of the Central American countries voted in favor of the U.S. proposal to allocate a greater market share within the quota system to the "Other Milds" group, whose coffee is favored by foreign roasters and blenders.

El Salvador, which depends for between 55 percent and 65 percent of its export earnings on coffee, will be the worst affected, followed by Nicaragua, which gets 35 percent to 40 percent of its hard currency from coffee exports.

The economies of both have been badly ravaged by guerilla wars and depends heavily on external financial support, El Salvador by the U.S. Nicaragua by the USSR. EC economic support is also playing almost as great a role as US economic aid to the region. Substantial increases from the EC were promised earlier this year on condition that the promising regional peace efforts continue to make progress.

The proposed increase in aid of ECU330mn to reactivate the Central American Common Market will now not even compensate for the loss of export earnings due to the collapse of the coffee agreement.

The depressed market is not, however, stampeding the Central Americans into hasty action. Although the coffee farmers feel uninspired, agricultural extension workers from the government and private sector are advising them to stay with their plantations.

They are aware it will be the Robusta producers, mainly forced Africa, that are eventually forced out of the market, not growers of high-quality "Other Milds" in Central America.

Aguerri said: "Crop forecasts show that production is up by 17 percent this year. We shall continue to sell everything we can. If the quota system is reintroduced within a couple of years, we shall by then have established a greater market share and be able to demand a greater quota."

It is the resonance of that "if" which continues to cloud the future for the Central Americans, however. They lack the sheer marketing power of Brazil and Colombia and do not have the resources to sustain an indefinite price war.
COPYRIGHT 1989 Lockwood Trade Journal Co., Inc.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Publication:Tea & Coffee Trade Journal
Date:Nov 1, 1989
Previous Article:Brazil flexible, can adjust coffee volume to free market demands.
Next Article:Coffee drinking study - Winter 1989.

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