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Will the coffee retention plan backfire?

Experts here warn that a bold plan by Central American nations to withhold coffee from the world market in order to force prices up will probably fail, and may even backfire on the fragile Honduran economy. Honduras, along with five other Central American countries and the tacit support of Brazil and Colombia, have agreed to withhold 20% of their coffee exports beginning Oct. 1, until prices improve substantially. The move comes as coffee prices - at their lowest in years - are leading some coffee producers to abandon their trees altogether and switch to more profitable crops.

"Too much coffee is being produced. We still believe that production has to be cut all around the world, not just in Honduras," said Luis Rolando Lopez, assistant manager at Beneficios Merendon S.A., a coffee exporter headquartered in San Pedro Sula. "In the past, under the ICO system, quotas were allocated by consumer nations as well as producers. With this plan, consumers have nothing to say about it."

In 1992, Honduras exported $140 million worth of coffee, based on an average price of $59.82 per hundredweight (qq). Coffee now brings in only 15% of the country's foreign exchange earnings, compared to bananas (44%) and shrimp (13%).

Richard B. Hopper, general manager of the non-profit agency FPX, which is trying to promote non-traditional exports, says the situation in Honduras is critical. "Coffee is still the No. 2 agricultural export, and prices are half what they were when the coffee pact was working," said Hopper. "When someone in an agriculture business is in trouble, they tend to cut corners. We foresee a deterioration of coffee plantations if this persists."

Just as the Honduran coffee industry is sinking, non-traditional exports (NTEs) are booming, most notably shrimp ($60 million), melons ($16 million) and pineapples ($10 million).

Altogether, NTEs will total $103 million in 1993. Roberto Villeda, general manager of the Association of Honduran Coffee Exporters (known by its Spanish acronym ADECAFEH), says that under the retention plan, 20% of the 1993-94 Honduran coffee crop will be safeguarded in warehouses belonging to the Instituto Hondureno de Cafe, a government agency.

Next year's crop is estimated at 2.5 million 46-kg bags, so the retention should be around 500,000 bags. Storing those 500,000 bags will cost no more than $2 million, he said. "We are sure that, with a retention scheme, stocks in consuming countries will run down faster than without a retention scheme," Villeda told the Tea & Coffee Trade journal. "When brokers see that we actually did it, there's going to be a little bit of panic."

Honduran coffee, which falls into the Other Milds category, sells at a 2-cent-per-pound discount in relation to coffees from other Central American countries. The industry employs 65,000 people, who earn an average 12 lempiras ($1.75) per quintal of coffee produced.

According to government statistics, the country's largest coffee producers are Hawit & Co. and Molinos de Honduras (each with $15.7 million in 1992 sales). Together, the two companies account for 21% of Honduran coffee exports. Other important exporters are Beneficios Merendon ($8.8 million in 1992 sales), Coex de Honduras ($8.6 million), Sogimex S.A. ($8.3 million) and Excafe ($7.1 million). The U.S. remains Honduras' most important coffee customer, taking 803,000 bags or 34.2% of total 1992 exports. In second place is Germany, with 576,000 bags or 25%, followed by Japan, with 273,000 bags, or 12%. Like most Honduran coffee exporters, Lopez of Beneficios Merendon says he supports the retention plan, for the simple reason that "it's better to sell 80% of my production at $90 a quintal than 100 percent at $50/qq."

Prominent Honduran banker Jorge Bueso Arias couldn't disagree more. "If we continue with this idea of forming cartels to retain production, we'll fall apart," Arias told the Tegucigalpa newspaper El Tiempo.

"I see with sadness that the producing nations are only interested in how to play with the coffee market, with export quotas and retention, while the consumption of coffee in the industrialized nations remains stagnant or is going down." Arias added that "if this tendency continues, retention won't help anyone because the people will consume less coffee very day."

British commodity expert John Young is another critic of government policy. A consultant who has worked all over Latin America, from Paraguay to Peru to Guatemala, Young says the Honduran government wants to "institutionalize inefficiency."

"Why pay for storing mediocre coffee? It's going to deteriorate anyway. It's not like French wine," he explained in an interview in Tegucigalpa. "If the government adopts any kind of scheme whereby they just store it, it will promote the production of very low-grade quality. It would be extremely dangerous if the government ends up buying undrinkable coffee and storing it at taxpayers' expense."

Young and his colleague, coffee specialist Federico Varela Herrera, are working in Honduras as advisers to the Small Farmer Agribusiness Development Program, begun in 1987 by the U.S. Agency for International Development (USAID).

"We're trying to help growers separate coffee grades," said Varela, originally from Costa Rica. "Secondly, we want to design and maintain information systems to keep records of what each farmer delivers to the cooperative, and third, to keep records of prices and premiums, in order to return benefits of premiums to the farmers who produce the best quality."

The five-year program, which operates on a $1 million-a-year grant from USAID, has produced a 15-module course entitled "Beneficiado de Cafe en Finca" aimed at Honduran coffee growers. The little yellow books are written in language easy for them to understand and are rich with illustrations. Varela and Young direct 70 or so "tecnicos," each of whom go out into the field and train the farmers in groups of 10 or more. Young said it is imperative that Honduras improve the quality of its coffee, and ADECAFEH's.

Villeda agrees. "The problem in Honduras is commercialization. Here we don't have wet mills like in Costa Rica," he says. "Here, 65,000 small growers live in the mountains and sell through an intermediary, which we're trying to cut out."

Young says that whether the retention plan succeeds or fails, his own program will move forward. "We're indifferent to the government's policy," he said. "We're not going to teach Hondurans how to produce bad coffee."

Larry Luxner is a freelance journalist based in San Juan, Puerto Rico.
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Title Annotation:Central American plan to jack up coffee prices may backfire on Honduras
Author:Luxner, Larry
Publication:Tea & Coffee Trade Journal
Date:Nov 1, 1993
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