Coffee growers forge a futures recovery

By Jean Guerrero

The Wall Street Journal

March 15, 2012

NARANJO, Costa Rica—Coffee producers in the heart of this region that grows top-notch beans learned a tough lesson in 2001, the last time prices sank: Even gourmet coffee can leave a bitter taste.

This time, they are better prepared. Prices of arabica beans, the kind coveted by connoisseurs for their mild taste, have hit 17-month lows. Rather than spending their profits on luxuries like new cars and the latest electronic toys, as many once did, growers from Costa Rica to Mexico to Colombia are diversifying to protect themselves from cyclical declines like this one.

The efforts of some Latin American farmers to lessen their reliance on coffee has pinched supplies of high-end arabica, which undergoes a rigorous and labor-intensive washing process, even as global demand has increased. Consumers in emerging markets are thronging coffee shops in increasing numbers. Without a sustained increase in output from Latin America, the biggest source of these sought-after coffee beans, a shortfall could develop, setting the stage for a rebound in prices over the longer term, analysts say.

Robin Rosenberg, an analyst at PFG Best, expects coffee prices will again hit $3 a pound over the next two years, as a supply deficit emerges. "Prices are going much, much higher," Mr. Rosenberg said. "But it may not be next week."

Since hitting a near record of $3.09 a pound in May 2011, coffee prices have plunged on expectations of a bumper crop from Brazil, the world's biggest coffee producer but not a traditional heavyweight in "washed" arabica. On Thursday, coffee prices rose 0.9%, to $1.8445 a pound.

Here in the Naranjo region, in Costa Rica's central highlands, Raul Herrera has been using profits from last year's high prices to plant banana trees among coffee plants. He also planted laurel trees to sell firewood and built a tomato-plant nursery.

"The idea is that when prices go down, I'll maintain a certain amount of income to sustain myself," Mr. Herrera said.

Mr. Herrera grows washed arabica beans on about 45 acres. He couldn't afford to maintain his plantation in the early 2000s when prices dropped. So the shade trees protecting the coffee plants became overgrown, stifling the plantation and causing a shade-loving fungus to damage half of his plants.

Latin American growers of the premium beans still bear the scars of 2001, when arabica prices hit an all-time low of 41.5 cents a pound, one-eighth the price only four years earlier. At the time, some growers in this region abandoned unprofitable fields or gave up altogether, with many migrating to nearby cities and the U.S. to find jobs.

Near the region of Naranjo, sprawling urban developments have taken over some of the best coffee land since then. Other former coffee-plantation land, high in the mountains where the soil is rich in volcanic minerals, remains overgrown with weeds and contains barren trees.

In the past decade, Costa Rica went from producing 2.3 million bags of coffee each growing season to 1.5 million bags, and the number of acres cultivated with coffee dropped from 247,000 to 212,000 or less over that time, said Ronald Peters, the president of the Costa Rican Coffee Institute.

Now, as production slowly recuperates, many producers who abandoned farms and returned, and others who remained, are determined not to put all their beans in one basket.

Instead, they are diversifying their incomes by planting crops such and corn and launching side businesses such as coffee tours and shops. Many of them also have signed up for certification programs, which require the farmers to live up to certain environmental and labor standards. For farmers, the main benefit of being certified is a guaranteed minimum price for their beans.

"They're definitely taking action to insulate themselves if prices go down," said Jack Scoville, vice president of Price Futures Group, a brokerage firm.

The trend cuts across Latin American countries that depend on washed arabica beans, which require subtle growing techniques and processing, and are the type nearly always used in gourmet coffee.

In Mexico, Cirilo Elotlan Diaz, president of the Regional Coffee Council of Coatepec, said 70% of the area's producers abandoned their plantations from 2001 to 2004. "Some of them went to the U.S., others went to work in the cities," he said.

But many of them have come back. Fernando Celis, an analyst at Mexico's National Committee for Coffee Organizations, said some have begun growing corn and other grains.

"We have more options now and more certainty," said Gabriel Barreda, president of Mexico's National Union of Coffee Growers.

The Colombian Coffee Federation said its country's high-end growers have begun planting corn and other crops as a way of diversifying incomes, and that most have been reinvesting by replacing old coffee plants with newer, more productive ones.

In Costa Rica, Jose Antonio Vera, head of sales and exports for Coopronaranjo, a cooperative with 2,000 producers, said that in recent years it has launched two supermarkets and a roasting mill where producers can grind their own coffee and sell at a greater value than their beans.

Coffee producers also are taking advantage of the fact that their plantations are often in scenic areas visited by tourists. Coopronaranjo started a coffee tour five years ago that draws hundreds of foreigners a year who each pay $22 to visit Espiritu Santo, an old-fashioned hacienda several hours from the capital of San Jose, to take part in the harvest and participate in coffee-tasting classes.

"There was a time where the producers had to choose between feeding themselves and feeding their coffee," Mr. Vera said. "So they neglected the plantations. It's good that in these moments that prices are good, they've changed their mentality and culture."

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Leslie Josephs contributed to this article.