Mourning Coffee World's Leading Java Companies Are Raking In High Profits But Growers Worldwide Face Ruin As Prices Sink To Historic Low

Robert Collier, Chronicle Staff Writer / Chronicle staff writer Louis Freedberg contributed to this report.

Sunday, May 20, 2001 (San Francisco Chronicle)

La Reforma, Guatemala -- The cost of a single cappuccino in the Bay Area is two bucks and rising, but you would never know it from the misery on the mountainsides where those coffee beans are grown. For millions of impoverished farmers worldwide, coffee has become a cruel business. Producer prices have plummeted in recent months to an all-time low, while prices on the retail end are mostly at an all-time high. For corporations profiting from this ever-growing gap, things couldn't be better. This is the dark side of coffee, the world's second-most-traded commodity after petroleum.

In many coffee-growing countries, crisis is brewing. International coffee prices have fallen by two-thirds since 1997, and no significant recovery is expected. The collapse has worsened rural poverty, spurred immigration to the United States and, in some areas, raised the specter of civil unrest. In Guatemala, the world's seventh-largest coffee producer, American java lovers' spending habits seem far away indeed. Large farms, where the average wage is $3 per day, are laying off workers in droves. The price decline's impact is even harder at small farms - those with gross sales of less than $5, 000 annually, which made up four-fifths of the nation's 63,000 farms before the price crash.

Around La Reforma, a town in the southwest coffee region, unemployment is rising fast. "Go up and down the hills around here, and there are lots of farms that have closed, not just mine," said Gonzalo Varillas, who is laying off the last of the 80 workers on his 220-acre coffee farm. "Lots of people depend on me, but I can't continue to lose money like this." Varillas explained that, as with other growers in the area, it costs him about $1 to produce each pound of arabica coffee and send it to an exporting firm. In return, he is paid about 50 cents per pound. Varillas' foreman, Oscar Mejia, who has worked at the farm for 26 years, can't make heads or tails of the new economic reality. "They say the price of coffee is low, but in the United States people pay lots of money for it, so I just don't understand anything anymore," he said.

Over the past two years, Guatemala's annual coffee exports have dropped in half, from $600 million to $320 million, and rural unemployment has soared to an estimated 40 percent. Last month, Finance Minister Eduardo Weymann warned that "the government will be paralyzed" if new revenues are not found. Some fear that the economic crisis could help undermine Guatemala's 1996 peace agreement, which ended 36 years of war between the government and leftist guerrillas. In the past few months, groups of re-armed rebels have appeared around La Reforma and several other coffee-growing areas, holding up buses and trucks and making speeches about injustice.

According to a report issued last week by the international aid agency Oxfam, similar trouble is occurring in many other nations where coffee forms a large part of earnings and small farms predominate - Nicaragua, El Salvador, Ethiopia and Uganda, to name a few. "The price slump . . . generates bumper profits for Nestle and Starbucks, and is also intensifying poverty and fueling social dislocation in the world's poorest countries," the report stated.

In Mexico, media reports say tens of thousands of people who once made a living from coffee in southern Chiapas state have migrated to the nation's major cities and the U.S. border. John Talbot, a sociology professor at Colby College in Maine who is an expert on the coffee industry, points out that a price crash in the early 1990s bankrupted many coffee farmers in Chiapas and led them to join the Zapatista rebels. At the same time, across the globe in Africa, the same crash pushed Rwandan coffee farmers into desperation, increased social tension and may have been a factor behind the ethnic Hutu massacres of a half-million Tutsis. Today, the U.S. war against drugs in Colombia is being hindered by the flood of thousands of out-of-work coffee growers and workers to the southern jungles, where there is work in coca farms and cocaine laboratories. "In the long run, having such low coffee prices creates a lot of chaos and instability around the world, which is not in the U.S. interest," said Talbot. He and other analysts say U.S. policy has helped cause the decline of coffee prices.

In the late 1980s, opposition from the Reagan administration forced the collapse of the International Coffee Agreement, a decades-old, cartel-like pact between coffee producing and consuming nations that guaranteed relatively high prices. After the pact ended in 1989 and the market was deregulated, prices plummeted. At the same time, the World Bank and its cousin, the Asian Development Bank, gave generous loans to Vietnam to plant huge amounts of low-quality robusta coffee - in line with international lending institutions' mandate to stimulate low-cost production and end market inefficiencies.

The strategy succeeded with a vengeance, as Vietnam went from being one of the world's smallest coffee producers to being second-largest, after Brazil. Vietnamese exports have tripled in the past five years, flooding world markets and driving down prices. At the same time, Brazil has created vast, mechanized plantations of robusta coffee in the center of the nation, far from the damaging frosts that in previous years often affected southern coffee areas and drove up world prices. The price decline of robusta beans - which are used in inexpensive blends and instant coffees - also dragged down the price of arabica beans, which are used for higher quality blends.

"Vietnam has become a successful producer," said Don Mitchell, principal economist at the World Bank. "In general, we consider it to be a huge success." Although Mitchell acknowledges the damage to nations that cannot compete with Vietnam's $1-per-day labor costs or Brazil's mechanized plantations - such as Guatemala, with its $3-per-day minimum wage - he said the losers must switch to farming other crops. "It is a continuous process. It occurs in all countries - the more efficient, lower cost producers expand their production, and the higher cost, less efficient producers decide that it is no longer what they want to do," he said. Many Guatemalan growers will have to uproot their coffee plants and change to crops such as citrus or cardamom.

"People who aren't in agriculture don't understand how complicated it is to be an efficient grower, or how hard it will be for coffee growers around here to switch and make a go of it," said Betty Adams, owner of a 419-acre farm near La Reforma. She is likely to escape her neighbors' fate only because she produces some of Guatemala's finest beans and thus receives a premium price from foreign buyers. Coffee growing nations are desperately floating rescue plans, from the downright loopy to the merely impractical.

In Guatemala, the National Coffee Association has experimented with burning coffee beans as a fuel - results were not announced, but apparently Big Oil shouldn't worry about future competition. Other Latin American nations want exporting firms to voluntarily withhold 20 percent of the total crop in their warehouses, or to destroy the 5 percent that is lowest quality.

Coffee's decline is part of a larger trend in international commodities trading, however. In addition to its campaign to sink the International Coffee Agreement, the United States also has helped abolish international agreements regulating sugar, cocoa, tin and rubber. Cocoa, sugar and rubber reached all-time lows earlier this year, while cotton, soybeans, peanuts and other crops now fetch less than they did a decade ago. As a result, nations that cannot subsidize their farm sectors are falling deeper into debt while their people get poorer. Some analysts call Washington's policy hypocritical, preaching free markets abroad but spending $26 billion annually on aid programs that prop up nearly every domestic farm sector.

Many developing nations have complained that the U. S. subsidies lead to dumping - selling abroad below production cost - and thus violate World Trade Organization rules. What's needed is a new version of producer-consumer price agreements, a "global Roosevelt New Deal to ensure that farmers get a fair price and have a level playing field," said Mark Ritchie, president of the Institute for Agriculture and Trade Policy in Minneapolis. But any such solution would take place too far in the future to help the people around La Reforma. The region's residents, most of whom are Mayan Indians, tramp the roads looking for work. They knock on gates and wait patiently - the men holding their broad-brimmed hats in their hands, the women clutching their shawls. The answer is always the same. No one is hiring. "Eating?" said Sebastian Alonso, one such job seeker, when asked what he is able to provide for his family at dinner. He thought for a long moment, his eyes blank. "Tortillas, some salt, some hojasanta," he said, referring to a common herb. "That's all."

"What's happening is a catastrophe," said Dr. Alfredo Cordon, the only medical doctor in the La Reforma municipality, which has 16,000 residents. "There's always been poverty and temporary unemployment, but I've never seen real hunger like I do now - people who literally have nothing to eat but tortillas."

Chronicle staff writer Louis Freedberg contributed to this report. E-mail Robert Collier at rcollier@sfchronicle.com.