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Dominican Republic: taxes hinder profits for grower.

Dominican Republic: Taxes hinder profits for grower

Coffee producers in the Dominican Republic say government taxes are cutting into their profits and making coffee production a less attractive industry. Low profits and plunging world market prices, coupled with the migration of farmers to urban areas, they feel, presents a bleak future for what was once a thriving business.

Law 199 of 1975 forces coffee producers to pay a 40 percent tax for each 100-lb. bag sold over 400 pesos (roughly US$64). That legislation was imposed after the government saw the chance to profit from high market prices following the Frost that destroyed most of Brazil's coffee crop that year. The law put more than US$15 million into the government's coffers last year, while sinking producers into an economic crisis.

"Law 199 penalizes coffee production since it absorbs some 90 percent of what could be profits for producers," says Eusebio Guzman, president of the Dominican Coffee Grower's Association. "While, last year, the government made millions from the tax, thousands of coffee producers were not able to afford new clothing or shoes for themselves or their families," he adds, noting that wage increases for laborers and an overall 60 percent inflation rate have added to the crisis.

Though Article 4 of the law stipulates that the tax may be suspended, whenever wage hikes and the cost of raw materials have a negative impact on profit margins for producers, the government has been reluctant to hear the sector's pleas to that effect. In August of 1978, President Joaquin Balaguer suspended the tax, just days before transferring power to incoming President Antonio Guzman. President Guzman, fearing that this could be a political tactic from the opposition party, to deprive his administration of those funds, reinstated the tax a few days later.

"When he was re-elected in 1986, President Balaguer found the law in effect, eight years after he had suspended it, yet, despite repeated requests by producers, he has failed to revoke it at this time," says Eusebio Guzman, noting that the conditions for enforcing Article 4 have existed for some time. "Besides rising production costs, salaries have risen by close to 500 percent in the last 10 years." Workers earn the equivalent of some US$4.50 a day.

In fact, Law 199 has become an important issue in the upcoming presidential elections, scheduled for May 1990. Association officials have already met with presidential candidates to discuss the issue. According to Guzman, all except for President Balaguer, who may himself seek re-election for a sixth term, have vowed to suspend the tax if elected.

"More than half of the country's coffee producers are bankrupt since they're investing more in their crops than what they are making as profits," Guzman explains. While many have already fled to towns and cities in search of jobs, others have switched to more profitable crops. "There is no incentive for people in the countryside, who have an agricultural vocation, to work in the fields."

Yet, there are those who, following family traditions, continue to plant coffee. An estimated 70,000 coffee farmers cultivate some 160,000 hectares of coffee fields throughout the Dominican Republic. The average size for their plantations is two hectares. Most plantations are strewn along the country's Central Cordillera which includes Duarte Peak (10,000 ft.) - the Caribbean's tallest mountain.

The country produces an average of 70,000 short tons of coffee, mainly Arabica Typica and Arabica Caturra, each year. Harvesting is carried out with traditional, rather than modern, techniques for which as many as 95 percent of the country's coffee is natural and free of chemicals. Producers say they would prefer to have more modern technology but commercial banks, which consider loans to coffee producers a high risk, are reluctant to extend the necessary financing.

The U.S. is the number one buyer of Dominican coffee, purchasing nearly 90 percent of the country's exports, with the remainder going to the European market. "After damage to Jamaica's coffee crops, Japan, which imported large quantities of Jamaican Blue Mountain coffee, has begun purchasing some amounts from the Dominican Republic," says Guzman. The country expects to sell some US$40 million worth of coffee in 1989, a figure that is modest when compared to the US-$600 million in revenues produced by tourism.

The local market remains strong, as Dominicans are avid coffee drinkers. Interestingly, foreign visitors also help to maintain local coffee sales stable. In addition to its six million inhabitants, the Dominican Republic welcomes more than one million tourists each year, many of whom not only enjoy Dominican coffee while in the country, but also purchase considerable quantities to take back home. In fact, an estimated one-third of the coffee produced here is consumed locally.

Guzman complains that, while producers are ailing, processors and exporters are making profits between 10 and 15 percent. The country's 30 or so processors, he says, purchase the beans from producers and later sell the product at a premium, keeping the difference as profit. State-of-the-art equipment is an added advantage in their favor.

Coffee producers are uniting under a common cause. The Dominican Coffee Growers' Association, founded in 1988, brings together some 15,000 producers and a great number of regional associations. Lobbying for the suspension of Law 199's tax is a major goal.

"The government is an unfair partner, since it participates only in the benefits," says Guzman, who feels the industry's outlook here is uncertain. "We see a somber future for us, from an economic standpoint. With low prices, we will continue to lose money," he adds, "but, if prices improve, the government will benefit the most."

PHOTO : Producers claim the government is making coffee less profitable.

PHOTO : Santo Domingo, the capital of the Dominican Republic is awash with history.
COPYRIGHT 1990 Lockwood Trade Journal Co., Inc.
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Title Annotation:coffee trade
Author:Fittipaldi, Santiago
Publication:Tea & Coffee Trade Journal
Date:Jan 1, 1990
Previous Article:Specialty teas from Sri Lanka.
Next Article:Education and promotional programs continue to brighten coffee's future.

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