Mexico’s Coffee Crisis : With Prices at Their Lowest Levels in Years, Growers of the Nation’s Top Export Crop Are Struggling to Stay in Business

The coffee exporters of Xalapa.

In Mexico 50 years ago, the words meant power: half a dozen barons who controlled the trade in a rural nation’s top export crop.

They married into the families of presidents and created a legend so strong that even now, whenever the government auctions off banks or television networks, rumors spread that the coffee exporters are among the bidders.

But here in the mountains of eastern Mexico, where the country’s finest coffee is grown, people know that the legend is just that.

As coffee producers begin their third-consecutive harvest with depression-level international prices, growers and brokers alike are struggling to stay in business. And, grimly, they recognize that their success will depend on someone else’s failure. The collapse of the coffee cartel has flooded the world market with beans from Latin America, Asia and Africa, driving down prices.

“We have overproduction,” said Miguel Cervantes, a third-generation grower. “Someone has to stop producing, so there is competition. But it is a bloody competition that causes poverty.”

Coffee pickers’ wages have not risen in three years, despite double-digit inflation. Workers earn 3 cents a pound--about $2 a day--to twist grape-size berries ripened to crimson off tall shrubs.

Cervantes’ neighbors have pulled out coffee bushes and planted sugar cane. Growers in remote regions supplement their income by growing marijuana or opium poppies.

Meanwhile, progressive growers are pushing for a study to determine whether Mexico should continue to produce coffee in competition with Brazil, where wages are low, and Costa Rica, where productivity is high--two or three times the yields here.

Mexico’s major export crop is clearly in crisis. International prices are plummeting, and President Carlos Salinas de Gortari’s free-market economic strategy has meant an about-face in national agricultural policy that has cast coffee producers adrift just as the world market is at its most cutthroat.

Despite the struggle, no one here advocates a return--either nationally or internationally--to the pre-crisis controls that artificially increased world prices by restricting coffee supplies.

Instead, Mexican exporters are proposing a new world coffee order: an agenda--based on free-market principles--that directly challenges Brazil and Colombia, the preeminent international producers.

With 40% of world coffee exports, those two nations are the dominant producer voices in the International Coffee Organization, a 73-country association of suppliers and consumers that--until July, 1989--controlled international prices by setting export quotas.

The system collapsed when consumers, led by the United States, and secondary producers--including Mexico--tried to trim Brazil’s quota. Brazil was entitled to sell 30% of the world’s coffee, even though buyers prefer the milder flavor of beans grown at higher altitudes in Colombia, Central America, Jamaica and this part of Mexico.

Brazil refused, and the quotas were dropped. Since then, Mexico and Guatemala have increased coffee exports to the United States, mainly at the expense of Brazil. Indeed, Mexico has ousted Colombia from second place among U.S. coffee suppliers.

“We broke the hegemony of Brazil,” said Fernando Riano, president of the Mexican Coffee Producers Federation, using rhetoric usually reserved for left-wing politicians’ attacks on the United States. “Consumers want good quality, and now international coffee companies can provide it.”

The spoils of the victory went to those big companies--such as Nestle and Procter & Gamble--that still account for the bulk of international sales, despite the surge of consumer interest in whole-bean coffees. Those firms upgraded quality while widening profit margins.

But growers’ earnings plunged to the lowest levels since the 1930s, as consumer prices remained steady while producer prices were plummeting 40%.

In a desperate effort to resuscitate prices, Brazil and Colombia proposed in September that producers hold back 10% of this year’s harvest. That initiative was rejected.

Like many growers here, Riano feared that the plan was a step back toward the old Brazil-dominated quota system that allowed tiny El Salvador to export more coffee than Mexico. Growers blame those restrictions and inept marketing for Mexico’s low profile as a coffee source.

Failure of the Brazil-Colombia initiative gave new impetus to the Mexican Coffee Exporters Assn. proposal for a sort of sales tax--a payment to the ICO that importers and exporters would split.

Proceeds would be used to buy up excess coffee, shrinking supplies to drive up prices. In contrast with the quotas that sometimes made top-quality coffee unavailable, under the Mexican system any buyer could purchase from any producer.

After spring harvest, the ICO would inventory surplus coffee bought with the tax proceeds. Producers with coffee stored in ICO warehouses would pay a higher sales tax the next season, as a penalty. The idea is to get demand and supply in balance, in terms of quality as well as quantity.

That scheme fits well with Mexico’s new free-market approach to agriculture. Nonetheless, the government did not support the proposal of its own exporters.

Officially, the reason is that a counterproposal to the Brazil-Colombia scheme seemed futile as the autumn ICO meeting approached. Unofficially, there are worries that most of Mexico’s 240,000 coffee producers could not compete long term in a free market.

With coffee accounting for just 2% of foreign earnings, Mexico is not as dependent on coffee exports as, say, Colombia, where coffee accounts for nearly one-third of legal sales abroad.

But 90% of Mexico’s coffee production is concentrated in three poor states--Chiapas, Oaxaca and here in Veracruz--and for those growers, exports are an essential four-fifths of their sales.

In the cool mountain afternoon, grower Cervantes walks between neat rows of shrubs growing higher than his head, checking the raw coffee beans. He is deciding whether enough beans have ripened to warrant harvesting this high up the mountain. Picking has begun in lower fields that ripen first.

Cervantes, a chemical engineer, is one of the few Mexican growers who has adapted the Hawaiian method of planting in rows--rather than randomly--to speed up picking, weeding and fertilizing. Until the crisis, he also methodically replaced plants past their prime, usually after 15 years.

But this year, Cervantes did not replant. He cut down on fertilizer and laid off three of the seven full-time workers who maintain his 57 acres of coffee shrubs.

“We are at our limit,” he said. “The good grower is at a break-even point. That’s about 5% of producers. Everyone else is losing money.”

Beyond the international crisis, Mexico is suffering from an internal crisis--the accumulation of decades of problems.

The tensions are at least as old as the portrait of a man in a top hat that hangs on the wall of coffee broker Federico Pinero’s office. The painting portrays Pinero’s grandfather, a Spaniard who emigrated to Mexico and began growing coffee around the turn of the century.

During the agrarian revolution of 1910, the elder Pinero was thrown out of the country and much of the family land expropriated.

From what was left, his sons created a business far beyond what their father imagined when he died in exile in Cuba. With the revolutionary restrictions on land ownership, growing coffee was not enough. They also had to trade it.

So Mexico’s oldest coffee export registry number belongs to the Pinero family. Federico Pinero’s father and uncle were among the famous coffee exporters of Xalapa (pronounced ha-LA-pa), contemporaries of Justo Fernandez, whose wife was the daughter of a cabinet minister and niece of Manuel Avila Camacho, president from 1940 to 1946.

In those days, Mexico produced fewer than 1 million bags of coffee a year--less than a fifth the current level and nearly all of it either in the area surrounding Xalapa or a southern region, called the Soconusco, that juts into Guatemala.

In the 1950s, the government encouraged coffee production in other areas. “They began to plant coffee in a lot of regions that really were not appropriate; they were too low or too dry to produce good coffee,” Pinero said.

Still, relations between the exporters and the government remained cordial until populist Luis Echeverria became president in 1970. Echeverria saw coffee as an egregious symbol of exploitation: a seasonal, unskilled work force at the bottom and the coffee exporters of Xalapa at the top.

He set out to correct such injustices. If the brokers would not pay high prices for coffee, the government would. Unable to compete with the government’s largess, brokers pulled out of the market. The budget of the Mexican Coffee Institute, a government agency that coordinates industry groups, soon outstripped those of many state governments.

The institute’s hand was strengthened in 1975, when the ICO adopted quotas; Mexico’s were administered by the government. International sales were controlled by an elaborate system of permits that required growers to sell a percentage of their crop into the domestic market at controlled prices before they could export.

The results were corruption and inefficiency. Nor did the effort do much to change the industry’s structure: Fewer than 0.5% of the growers still produce one-third of Mexico’s coffee.

But in December, 1988, Salinas took office, pledging to continue turning over the economy to the private sector, including elimination of the institute’s role in marketing coffee. And eight months later, the international coffee quota system collapsed.

Mexican growers were ill-prepared for the double shock. “Under the old, paternalistic system, the government told us what to do, and we lost our initiative,” said Riano. The government had broken the power of the coffee exporters but left nothing in their place.

As prices plummeted, growers kept wages steady--effectively cutting pay in an inflationary economy. At this time last year, coffee beans rotted on the bush because workers refused to pick for 200 pesos a kilo--less than 3 cents a pound.

Eventually workers accepted the wages. But this year many refused to return to the fields, where continuing inflation means that good pickers barely make the minimum wage of $4 a day.

That leaves the coffee picking to people like Josefina Puentes, a mother of four whose husband works year-round on coffee grower Rafael Torres’ 175-acre farm near Coatepec, about 25 miles south of Xalapa.

Ten years of picking coffee has taught her how to dress: two shirts for protection against mosquitos and thorns and a bandanna around her head to keep her hair from getting tangled in the bushes as she picks the ripe coffee beans from grape-like clusters.

Work starts when Torres blows a horn--literally a cow’s horn--to tell pickers where in the field to begin. Puentes’ youngest child, 4-year-old Regina, scampers through the rows, adding her pickings to her mother’s basket. Even with Regina’s help, Puentes usually has only about 77 pounds when the day ends at 4 p.m.--$2.30 for a day’s work.

Workers in Brazil are paid the same per-kilo price. But they usually end up making more, because Brazil has a different type of coffee bush that can be harvested more quickly. Growers here do not plant those bushes, because they produce a less flavorful bean.

But small farmers gathered at the thick-walled, red concrete Coffee Growers Assn. building on the town square in Coatepec say they cannot pay more.

“I give a worker 200 pesos a kilo, and Pinero offers me 400,” said Gregorio Torres. “I am splitting with them as it is. And I have to buy fertilizer and pesticides all year round.”

Grower Cervantes has heard those arguments before. They lead him to believe that the only solution for the Mexican coffee industry is radical change.

“Coffee was sustained with cheap labor and subsidized inputs,” he said. “Now, we have to pay full price for fertilizer and compete with the construction industry for workers.

“The only thing we can do is increase productivity,” he says. “That implies a change of mentality beyond most of today’s growers. The coffee fields will pass into other hands, or we will no longer be coffee producers.”

Coffee Prices

Coffee growers have suffered severe price swings. Figures are average price per pound.

Source: International Coffee Organization