NetNews Usenet Archive 1992 #19/NN_1992_19.iso/spool/misc/activism/progress/6221

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From: [e-mail] (Rich Winkel)
Subject: El Salvador: Proceso 527: Economy
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/** reg.elsalvador: 161.0 **/
** Topic: Proceso 527: Economy **
** Written  9:39 pm  Aug 31, 1992 by [e-mail] in cdp:reg.elsalvador **
From: [e-mail] (Centro de Informacion Documentacion y Apoyo a la Invest. - UCAJSC)
Subject: Proceso 527: Economy

Center for Information, Documentation and Research Support (CIDAI)
Central American University (UCA)
San Salvador, El Salvador

PROCESO 527
August 26, 1992

ECONOMY:
Coffee crisis and new economic directions

     Ever since the middle of last century, coffee has provided the
bulk of export income, a considerable proportion of the Gross
National Product and fiscal revenues, as well as a good part of
national employment. In 1988, coffee production represented 6% of
the GNP, about 15% of fiscal revenues (a modest figure considering
revenues achieved in earlier years), and about 60% of export
income. Furthermore, it generated about one-third of national
employment in the agriculture and livestock sector.
     Ever since the breakdown of the quota agreement within the
International Coffee Organization (ICO) on July 3, 1989, the share
of coffee revenues in the abovementioned economic indicators has
been dropping.
     Faced with a drop in international coffee prices, last August
19 -over three years after the breakdown of the ICO agreement- the
Salvadoran government asked the Legislative Assembly to provide a
$45 million subsidy for coffee growers. This contingency measure
was motivated by the loss in profitability in the coffee sector.

Evolution of coffee prices since the breakdown of the ICO accord
and its implications for fiscal revenues and trade

     Before July 1989, international coffee prices stayed above
$1.00 per pound; the price of a 100-pound bag was around $123.
Immediately after the expiration of the accord, the price dropped
to $85, and by August 1991 the price remained around $82.
     The most drastic drop in prices has occurred throughout the
present year, as we can see in Table 1. Between March 30 and August
13 the price of coffee dropped from $70.30 per 100-pound bag to
$50.85. In other words, between July 1989 and August 1992 the price
dropped by around 60%.
     As a consequence of this situation, the profitability of
coffee has been drastically reduced, reaching its lowest point
ever. According to sources close to the coffee growers, the cost of
production per 100 pounds is approximately $45; on the basis of
that rate, once taxes are deducted, the grower can hope to get a
profit of about $5.40 per 100 pounds, in sharp contrast to the
profit of about $53.30 they received when international prices were
at $123 per 100-pound bag [the calculations are on the basis of the
current exchange rate of $8.50 per colon].
     In addition, fiscal revenues generated by the coffee export
tax have declined seriously. In 1990 the coffee tax produced only
about 8% of total revenues. Given current prices, tax revenues from
coffee exports will account for even less. The current tax on
coffee exports is 30% on profits over $45 per 100 pounds. By August
13 of this year, the tax produced only about $2.60 per 100 pounds,
while in 1990 it produced about three times more.

                             TABLE 1
              COFFEE PRICES ON THE NEW YORK MARKET
                         (per 100 lbs.)
     ----------------------------------------------------
     Date                      Delivery date
                           May/92       July/92
     ----------------------------------------------------

     March  30             67.95         70.30
     April  28             63.85         64.85
     May    20             64.30         66.30
     ----------------------------------------------------

                           July/92      Sept/92
     -----------------------------------------------------
     June   11             60.00         61.90
     June   30             55.60         58.10
     July   27             56.1          59.00
     August 13             50.85         53.70
     -----------------------------------------------------
     Source: Salvadoran Coffee Council

     The share of coffee in total exports has also been severely
reduced. Between the first third of 1990 and the first third of
1991, the share of coffee in total exports dropped by 30.6%. No
figures are available yet for the same period in 1992, but one
indicator could be the contraction seen in traditional exports
(Table 2) -mostly due to the drop in coffee exports-, which were
down by 17.5%, a greater drop than the 13.8% drop of the previous
year, but less than the total reduction in coffee exports during
that period, which was certainly offset by increased exports of
sugar, cotton and shrimp.
     In addition to the drop in fiscal revenues and traditional
exports, the drop in international coffee prices will have severe
repercussions on coffee growers due to the reduced profitability of
their operations.

                             TABLE 2
         El Salvador: Exports January-April 1991 & 1992
                        (Thousands of $)
---------------------------------------------------------------
               Jan-April            Jan-April       Variation
                  1992                  1991           %

Exports           214,400            211,511          1.37

Traditional        91,300            110,618         (17.5)
   Coffee           n.a.              77,949
   Cotton           n.a.                 243
   Sugar            n.a.              24,447
   Shrimp           n.a.               7,979

Non-traditional   123,100            100,893          22.0
---------------------------------------------------------------
Source: Central Reserve Bank
n.a.: Breakdown figures not available

The distribution of production and credit

     Coffee production is principally centered in large-scale
operations in private hands. Participation by small growers and
cooperatives is quite limited, considering that the land reform
only affected a small percentage of large growers, and that
cooperatives only own about 17% of coffee-growing lands.
     Furthermore, the coffee processing industry is also highly
concentrated: of the 175 processing plants in operation in 1978, 44
of them (24.9%) employed 74.6% of all personnel in the sector,
generated 78.9% of gross production and received 79% of all
profits.
     Given that the large growers obtain the greatest share of
resources for their product, one might imagine that these would be
the hardest hit by the crisis. Nevertheless, one must not
underestimate the effect of the crisis on small growers. In the
first place, the latter have no other means to absorb the cost of
unforseen problems, and in the second place, the lands they
cultivate are of lower quality and utilize lower levels of
agricultural technology, which means a higher cost per unit.
     Any attempt to evaluate the effects of credit to the coffee
sector must take these factors into account. The high level of
concentration in the coffee sector means that the resources used to
finance the sector will have limited social benefits given the
property structure, despite arguments based on the capacity of the
sector to generate employment.
     During the last four years, coffee growers received over 66%
of all agricultural credit. During the first half of this year,
according to Central Reserve Bank figures, the commercial and
mortgage banks awarded over 1,030 million colones in credits to the
agricultural sector. No figures are yet available to show what
share went to coffee growers. In August a $45 million subsidy for
coffee growers was proposed to the Legislative Assembly; this is
equivalent to 36.6% of all credit awarded during the first six
months of the year by commercial and mortgage banks.

Coffee production and new economic directions

     The two most important objectives of the government's economic
policies are promoting exports and reducing the budget deficit.
Recent trends in the coffee sector have worked against both goals.
     In the first place, the coffee crisis has increased pressure
on the national budget, because the share of coffee revenues in
total fiscal revenues has continued to drop, and because the crisis
has forced the government to use extraordinary budget resources to
subsidize coffee production. In the second place, the crisis has
counteracted any beneficial effects that increased non-traditional
and other exports may have had on the trade imbalance.
     The principal cause of this unprecedented crisis is the sharp
drop in international coffee prices, and it appears that they have
yet to hit bottom. The situation is even more serious if we note
that there is no sign of a new agreement in the ICO, and even if
one were to materialize, it will be hard to get prices back to 1989
levels. In addition, world demand for coffee could drop while
buyers slowly use up the reserves they bought at low prices.
     This situation is forcing the government to take two emergency
measures: restructure the tax system in order to maintain fiscal
revenues high enough to cover public spending, and promote more and
diversified agricultural exports which are less dependent on the
vagaries of the international market and have greater export
potential. Increasing agricultural credit and revising the
structure of its beneficiaries are two factors to take into account
when making new policy decisions.


** End of text from cdp:reg.elsalvador **