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Starbucks Corporation : Honduras coffee boom feels growing pains

05/08/2012 | 05:07pm US/Eastern
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In the small town of Marcala in the western mountains of Honduras, farmers are harvesting more coffee than ever before, part of a nationwide push to capitalize on higher prices that has doubled production in less than 10 years.

But the boom comes with a cost.

The coffee is coming in faster than growers can handle it and they are running out of space to dry all the beans, which need time in the sun or in drying machines to stop fermenting.

Improper drying can ruin coffee for export. A drastic reduction in quality will slash the price the coffee can fetch.

Local coffee company Cafe Organico Marcala (COMSA) was forced to rent out a nearby soccer field this year and cover it with plastic sheets to air out coffee cherries after their cement-drying patios overflowed.

"We've had an avalanche of coffee," COMSA's manager Rodolfo Penalba said, as workers raked beans over the plastic in neat rows. They survived this year by using the tarp but next year's harvest would be even bigger, he added.

Right now Honduras only has around a dozen big coffee processing centers in larger cities or near export ports and around 20 smaller centers in more remote coffee regions.

"Honduras doesn't have the capacity to dry all the coffee coming in 2011/12 in an efficient way, and even less so for what's coming in 2012/13. This is going to lead to losses on a national level if the beans ferment," said Eduardo Aguilar, the vice president of the Honduran coffee traders' association.

The problem hit a peak at the height of the harvest in January and February when coffee cherries were ripening in several regions of the country. The industry is hoping the government or development banks will provide loans to help the sector ramp up infrastructure.

Honduras will export nearly 5.4 million 60-kg bags of arabica coffee next season, well over double the volume in the 2004/5 cycle, cementing the country's position as the region's biggest coffee producer.

It is the only country in Central America that is significantly increasing production, aside from Nicaragua, Central America's smallest producer.

Unlike most of its neighbors, Honduras enjoys inexpensive land prices, keeping the coffee business attractive in an economy heavily reliant on agriculture and textiles.

Costa Rica, with a stronger tourist-based economy, has seen farm land shrink, gobbled up by condos for vacationers and American retirees.

Honduras is now tied with Mexico for a spot at the world's No. 3 arabica coffee producer after Brazil and Colombia, according to the U.S. Department of Agriculture. Starbucks and other top-end roasters who focus on quality tend to use mostly arabica beans, not the robusta variety.

But if Honduras cannot improve infrastructure fast enough, quality could fall below standards demanded by exporters.

Improper drying affected between 230,000 and 383,000 60-kg bags of coffee this year -- 5 to 8 percent of the crop, according to producers and traders. Some of this coffee could not be shipped abroad and went instead to local consumption, local industry officials said.

Several dealers said mold has been found in Honduran beans.

"There have been some quality issues," said one U.S. importer, who declined to be named. "It's an issue but I don't think it's affecting everything. They're catching it at the certification process.

The problems may be hurting prices. The average price differential for strictly high grown Honduran coffee sold in the United States dropped in the first week of May. The differential, which helps to gauge a bean's quality and availability, fell to 5 cents over the ICE Futures U.S. benchmark coffee contract, from 5.5 cents a week earlier.

BAD REPUTATION

This has complicated efforts by Honduras to boost its reputation as a producer of higher quality coffee. It hopes to compete with its neighbors Guatemala and Costa Rica, which can fetch higher differential premiums for their gourmet beans.

"Honduras has traditionally been a lower-priced exporter," said Jack Scoville, a commodities analyst at The Price Group. "Their quality has been considered a little lower but they are working very hard to change that image."

"Now they are producing a lot more coffee and I haven't heard of many new (coffee processing facilities) being built just yet, so that could be an issue going forward," he said.

So far, Honduras has not had problems finding buyers, said Scoville. Increasingly roasters are scouring for lower-priced options, or even turning to cheaper robusta beans.

"I think you are seeing the market chase lower quality," Scoville said. "Honduras will be able to sell."

MORE FARMERS, MORE LAND

The world's growing thirst for coffee boosted prices here to a level that has inspired growing ranks of economists, doctors, lawyers, engineers and other professionals in Honduras to swap their ties for coffee baskets.

There were 101,489 coffee producers in Honduras last year, up from 92,706 in the 2009/10 season, the national coffee institute said. The country has added nearly 27,000 acres of new coffee-growing land.

In May 2011, ICE arabica futures hit a 34-year peak at $3.0890 per lb. They have since dropped about 40 percent, hitting a 19-month low on Monday at $1.7360 per lb. But the slide has not deterred farmers here.

Some 85 percent of farmers in Honduras scrape out a living on tiny plots they cannot afford to abandon even if prices fall.

"The price has gone down but it is still competitive for us," said IHCAFE's technical manager Mario Ordonez.

Coffee cultivation has spread to most of the country and the industry is scrambling to improve infrastructure.

Officials said the national coffee institute IHCAFE wants to launch projects that would give government financing and loans from regional development banks to farmers to buy drying tools.

Each drying machine can cost up to $70,000, said coffee machinery vendor Juan Osorto. "People who have been able to get financing are buying drying equipment since there is so much more coffee," said Osorto, who so far this year already sold 25 driers. Each can process 153 60-kg bags at a time.

Similar schemes have worked in Brazil and Taiwan. IHCAFE director Victor Molina says the help could boost the country's processing capacity by 1.5 million 60-kg bags by adding 135 new facilities, complete with electric drying machines, and some 12,000 smaller, solar drying units.

Representatives from IHCAFE traveled to Brazil to drum up support from Brazilian lenders to purchase mechanical driers.

"We need government help," Molina said. "We are going to do everything possible so that we don't lose out."

(Additional reporting by Mica Rosenberg and Marcy Nicholson; Writing by Mica Rosenberg; Editing by David Gregorio)

By Gustavo Palencia

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