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Monday, October 28, 2002

By T. Christian Miller and Davan Maharaj, Los Angeles Times

MATAGALPA, Nicaragua -- Ernesto Alonso has coffee in his blood.

He grew up on coffee farms. He planted the dark green bushes on steep and shady mountains. He helped workers harvest the bright red coffee berries. He spread out the beans to dry in the sunlight.

So now, when the 56-year-old looks around the ruins of his 100-acre coffee farm, despair crosses his face. He has laid off most of his workers. The bank wants to seize his farm. The coffee that has sustained his family for generations is nearly worthless.

"I don't know what is going to happen," Alonso said, sweeping his arm across rows of coffee bushes on a hillside overgrown with jungle.

From Africa to Latin America, coffee farmers have been hit hard by a glut that has sent wholesale prices tumbling to their lowest levels in real terms in more than 100 years.

In Colombia and Kenya, coffee growers have begun planting drug crops. In Vietnam, which is largely responsible for the glut, farmers clearing forest land to grow more coffee have clashed with local ethnic minorities. In Central America, more than 540,000 part-time and permanent jobs have been lost.

"Many people are emigrating because of coffee's low price. We are living in poverty," said Luis Toledo, a 28-year-old from Oaxaca, one of Mexico's coffee-growing regions. "Many people have gone to the U.S., including almost all the young people. There are more jobs in the north than here."

With coffee prices at record lows for the third year in a row, the fall harvest promises to be even more bitter.

The extent of the crisis has largely been masked by robust retail coffee sales. The big coffee companies have continued to report healthy profits. Coffee outlets such as Starbucks have maintained, and in some cases increased, their prices for coffee.

But those profits aren't trickling down.

The problem began with the fall of the Berlin Wall. For years, a worldwide coffee agreement had kept prices artificially high to prevent the development of pockets of poverty that would be susceptible to communist takeover. When the agreement collapsed, the markets opened up and prices began to vary widely. Countries such as Vietnam and Brazil sharply stepped up production. Vietnam's output has soared from fewer than 2 million 132-pound bags a year in the early 1990s to 14 million bags, making it the world's second-largest coffee producer, behind Brazil.

This year, worldwide coffee consumption is expected to equal about 105 million bags.

But coffee producers are expected to harvest 10 million more bags than that. Worse, coffee-growing countries already have 40 million surplus bags stored up.

The huge oversupply has allowed the coffee traders and big corporations to offer ever-lower prices to farmers for coffee, but the savings have not been passed on to consumers.

The price paid to coffee farmers for a pound of coffee has dropped 75 percent since coffee briefly peaked at $1.81 per pound in May 1997. During the same period, the retail price for a pound of coffee in U.S. supermarkets has fallen 28 percent, according to the Bureau of Labor Statistics.

The difference has meant more profits for companies such as Procter & Gamble, Nestle, Sara Lee and Philip Morris, which together control about half the coffee market. (Despite Starbucks' ubiquity, the amount the company buys accounts for only about 1 percent of coffee purchases.)

Ten years ago, coffee-producing countries got about one-third of every dollar spent on coffee. Now, they get less than 8 cents.

Prices have dropped so much that, in most countries, it costs more to grow a pound of coffee than it's worth on the open market.

The resulting misery can be seen everywhere in Nicaragua's northern mountains, the heart of this nation's coffee zone.

Coffee dominates daily life here. Great yellow sheets of coffee beans dry at the roadsides. The mountainsides are covered in coffee bushes. Coffee exporters, producers or co-ops seem to occupy every other building.

But now that coffee has gone bust, so has the region. More than 100 coffee farms have been seized by banks. Tens of thousands of workers are jobless.

Those who suffered most were temporary workers. Many of them lived on the coffee plantations, in ramshackle cabins with small plots of land that they used to grow basic foods such as corn and beans.

Now, turned away from the farms, thousands have gathered in makeshift shantytowns by the sides of roads, begging for food, help and jobs.

Marilla Blandia, 17, held her 18-month-old son, Ronald, in her arms at a shantytown about 60 miles north of Managua, the capital. His head lolled to the side. He was suffering from diarrhea. Flies covered his face.

"We don't have food. We don't have work. We don't have anything," she said.

The Nicaraguan government has tried to respond, without much success. Natalia Barillas, the minister for family, recently received a shipment of about 6,000 pounds of food and aid from the Mormon Church. She had to ask a friend to use his truck to deliver it.

"We know the kids need food. We know that people need jobs. But what can we do?" she said. "We are a poor country."

The crisis has become a test of globalization, of the idea that open markets can lead to increasing wealth. If poor countries with cheap labor can't make money from a work-intensive crop such as coffee, what can they look to as a source of export income?

"When you have countries like those in Central America or Colombia or those in Africa that are very dependent on coffee, it's very difficult to just say, 'Wait and see,' " said Nestor Osorio, the head of the International Coffee Organization. "While you're waiting, you're going to see social unrest, more drugs being grown and more people dead."

Solutions are difficult to come by.

Nearly everyone in the industry -- from small growers to big buyers -- acknowledges that there is no chance of a return to the age of price quotas.

The big coffee companies have placed most of their hopes in persuading coffee drinkers to drink more of the beverage, thereby eliminating the surplus of beans on the market.

Tonia Hyatt, a Procter & Gamble spokeswoman, said the company recently introduced new types of flavored coffees to entice consumers to buy more.

She also insisted that P&G had passed on the savings to consumers, noting that the retail price of a can of Folgers had dropped 50 percent in recent years.

Analysts explained that one reason retail coffee prices have remained high is that coffee companies build in profits to avoid market fluctuations. As for outlets, the price of coffee makes up only a small part of the final price of a cup of java.

"We have a commitment to promoting demand," Hyatt said. "That's in the best interests of the consumer, our shareholders and the industry."

Others place their faith in the Fair Trade movement, which certifies that coffee farmers receive at least $1.26 per pound for their coffee -- enough to ensure that bills are paid with enough left over for education and health care. But less than 0.2 percent of the coffee consumed in the United States and 0.9 percent of the coffee in European Union nations is Fair Trade coffee.