The coffee economy of Colombia

-;' CATATLOG No. 68 This paper is prepared fw staff use And is not for publicatioT. The views espressed are those of the author and not nwcesaarily those of t1e Bank. INTERNATIONAL BN FOR 1ECONSTRUC'IOi ANM DEVELO1PNT Economics Department Working Piper No. 15 TM COFFE ECONOMY OF COMOMBIA May 21, 1968 This paper is a contribution to and will form part of the World Coffee Study, which is being sponsored by the IED, the Food and Agriculture Organization of the United Nations, and the International Coffee Organizat. tion, and is being carried out under the direction of Dr. Gerda Blau, Director for Special Studies of FAO. Preared bys George Kalmanoff  This report is based on the findi-ngs of a MisSion to Colombia in September/October 1967, sponsored by the Tripartite (IBD/ICO,/FAO) Coffee Study. The task of the mission was greatly facilitated by the iniraluable cooperation of the National Federation of Coffee Growers of Colombia. The assignments on the mission wekre as follows: George Kalmanoff (IBD) - Chief Onno van Teuten (FA) - Agricultural Economist Roberto Egli (FAO) - Agronomist Keith B. Griffin (Consultant) - General Economist Ralph A. de Rosayro (FAO) - Porestry Specialist ,  TABLE OF CONTENTS .a . IPage No'. SUMMARYAND CONCLUSIONS . . .g.... . ..... i xi I COLOMBIA IN WORLD COFFE TRADE . . . ..... 1 Share in World Coffee E.xport:3.e...c.....e.* .1 Destination of aports 3...e * * . * 3 Competitive Factors . . . . . . . . . . . 10 I.ET. COFiFEE ANiD THE ECONOMIC DEVILO PWNT F dOLOIMBIA 1? Structure and Growth of DomesLic PtodVict . . 17 Agriculture ......... ec 20 Manufactuiring . . . . * . . .. i .e . 26 Population Growth and Employ,ment . . . . . . 28 Coffee and Government, Reveruies, . . . . 30 Coffee and the External Sector . . . . . . . 31 III. STRUCTURIE A10D PRiOSPECTS OF TH13 COLOMBIA3i COFFEE SECTOR . . . . . . . , 31 D~ 1- 3 e4 Trends of Overall Productiorn, Planted Area7 and Tree Numbers 34. e cecoc e c 34 Reg.ional Distribution of Corfee Cultivation . 41 Conditions of Coffee Cultivwition . . . . . . 46 The NationaRl Federation of Coffee Growers and the M.arketing Structure ....... 53 Inputs, Costs, and Returns of CofCee Cuiltivation . . . . . . . . . . 59 For7mation and Trend of Internal Coffee Prices . . . e . 65 The Coffee Adjustment Problem . . . . . . . 75 IV. THE CO^6EE DIVERSIFICATION PROBLEM . . . . . . 91 The Caldas Diversification Pi ogrn . . . . . 91 Plans for Future Coffee Diversification e . 101 Problerns of Coffee Diversification . . . . 106 Requirenents of a Diversification Strategy . 116 Annex - Forestry in Colombia . . e . . . . 122  No. P'age No. 1 Colombian and World Coffee Expor s, S 1930-1966, 5-Year Averages * . . . * e o 2 Colombian Coffee Exp-orts, Major Rtegional Distribution, 5-Year Averages 194.6/47- 1965/66, and 1966/67 4** .* * 4 3 Dizitribution of Colombian CoCCefi Exports 'ty S,ecified Markets, and Share of the Markets in World Trade . . . . . e . * * 6 .4 Exports of Colombian (Coffee to Annex A and Annex B Markets by Trade P'ractice, 1960/6l-1965/66 ............ 8 5 Colombian Coffee Exports under Bilateral Paymaents Agreements, 1960.-1.966 * 9 6 U.S. Inport Unit Values of Coffee, by Main Types, 1953-1966 . a . .e. *. . e a I 12 7 Indicator Price Ranges for Selective Partial Quota Adjustmients uinder InternLltional Coffee Agreement, 1966/67 and 1967/68 . . 13 8 Average Annual Growth Rates and Ca,osition of the Gross Domestic Product by Sec tor of Origin, 1950-1966 ..... ..a 18 9 Growth of Agricultural Pl"oduction, 1958-1965. 21 1.0 The Use of Agricultural Land, 1960 , . * 2 1LI Growth of Major Cities, 1951-1964 . . . * . 29 12 Cof fee Production, 1930/31-1966/67, Selected Years . , . . . . 0 . . . . . 36 13 Area Planted to Coffee, 1955/56-1966/67, Selected Years . I . . . * . . s D * 37 lb Age Composition of Coffee Trees in 1962/63 . 39 15 Regional Pattern of Coffee Prodtuction . . . 43  TEXT TABLES (Cont'd.) No. 16 Coffee Yields by Departments, 1955/56 and 1965 . * . . e . . e . e . . . . . . . . 45 17 Co f fe Harvest Calndar e00 * e . 000* 47 18 Distribution of, Coffea, Frms by Size, National Totals . .. , .... * , . 50 19 Department of Caldas - Nuber and Size of Coffee Farms and Area Planted to Coffee, 1965 * e . . . . e e - . * . * * * . . 52 20 Proportion of CoffGe Exports by Federation and by Private Traders, 1959-1966 e . . . 57 21 Inputs and Returns for Coffee Cultivation, by Varying Yields per' Hectare, September 1.967 A . . c . . . * * e * * . . . . 61 22 Coffee Baawice Sheet, 1959/60-196/67 . e . 77 23 Colonbian Coffee Production and EVports, and World Coffee' Exports . * 0* . * . 79 2L4 Colombian Coffee Exports and Quotas under the. International Colffee Agreement . . . 80 25 Projected Sutrp1uses of ColombLan Coffee, 1967/68-1972/7.3 . . . .0 * 0 0 o It .. . . 83 26 Caldas Five-Year Regional Development Program 1964-;968, Distribuition and Prgress of Investhdents . * * ** 0 914 27 Caldas Cre4it Program: Destination of Loans, 1 964-m~id-1967 4* ** C 96 28 Caldas Credit Programn: Crop Area and Number of Animals Financed, 1964-mid.4967 * . * * 97 29 Pilot Diversification Project - Planned \ Substitution ror Cof fee * a o a e * * 103 30 Pilot Diversificationi Project Labor Relu.irements for Selected Crops and Live- stock Act itie s .............. 105 S s il a u M p li z s r s j & . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . ...... .jJ@;2mt>Swc-Atz .< az, t .X at  APPENDIX TABLES No. .Page No. I Colombian and World Coffee Expoits, 1930-1966. 15 II Colonibian Coffee Exports,' by Principal Destinations, 1946/47-7965/66 l . . . . . 16 III Coffee lroduction in Colombia, 1930/31-1907/68 86 IV Indices of Domestic Coffee Prices and Cost of Living, 1930-1967 . . . . & . *i - * * . 88 V Indices of Coffee Prices, New York, and Domestic Wholesale Prices of Coffee in Colombia in Real Terms, 1.930-1967 . . . . e 89 VI Colombia: Cof fee Prices and Production in Selected Periods . . 90 MAPS AND GRAPHS Coloimbian Coffee Map . a * * . e * e a * . 9 a . . 42 Graph 1 Colombia: Indices of Domestic Coffee Prices and Cost of Living ... . . * 70 Graph 2 Colombia: Indices of Coffee Prices, N.Y., and Domestic 'iholesale Prices of Coffee in Real Terms . . . . . . . .. . . . . 72 Graph 3 Colombia: Coffee Prices and Production for Selected Periods. 740  SUJIMARY AND CONCLUSIONS Colombi.a in World Coffee Trade Colombia, with a level of exports of about 6 million bags per year, is the second largest coffee exportliig count;ry after Brazil, accounting for some 13 percent of the world total. This is about the same as the share held by Colombia in the early 1930's. Its share rose to substrantially higher proport.ions of total world exports during the Second World War and in the post,-war period up to about the middle 195('s, buit since then Colombian export growth han faZ.led to keep pace with that of world exports, In the pre-war period, Colombia's share' of world exports advanced largely at the expense of Brazil, whic:h was unilaterally holding exports back ill an effort to sustain the price. With the weakening of world prices in the mid-1950's, Colomrbia joined with Brazil in efforts to support the price by restraining exports, and other coffee expo-ting countries expanded both production and exports at the expense of the two leaders. During the post-war periodi there has been a marked shift in Colombian coffee exports from the United States to Europe, with the present position being that the volume of exports to Europe is almost as large as that to the United States. This occuirred in connection withl a shift in United States purchasing to cheaper sources of supply, especially to AUrican robusta coffees. In the face of these developments,, Colombia has attempted to diversify its markets as broadly as possible in Europe. In this effort, it has relied to a considerable extent on exports of coffee under bilateral payments agreemtns. Exports under such arrangements have increased more than four times since 1960, and now account for about 15  pereant of total exports, or close to 1 million bags per year. As these ccnpetitive difficulties have been encountered, there has been stnewhat of a narrowing of the price prenium over other types of coffee which has traditionally been cbmmanded by Colombian coffee Colombia recently p.-rticipated actively in a movemtnt under the International Coffee Agreement to narro the margins among the price ranges established for its coffee and for other types of coffee, in application of the selective price criteria for adjustments of export quotas diff6rentiafly ror 'the' several types of coffee. Colbibia was not prepared to suffer cuts in its export quota in order to sustain the price for its coffee at substantial margins over those of the other types of coffee. Coffee and tli Economic Deveiopmgnt of Cqom~ Coffee cultivation accounts .for 7-8 percent of the gross domestic product of Colombia, or about, one-fourth of total farm output. It accounts for about one-sixth of the croplands under cultivation, and is c;arried out on more than 300,000 farms with a population of clese to 2 million persons out of the total population, of 19 million. Excluding taxation on coffee earmarked specifically to finance the accumulation of surplus p,roduction, cof'fee provides about P-10 percent of general govern- ment revenues. Impoxrtant as coffee is in these relationships, its kcey role derives from the fact that it is the major source by far of the country's foreign exchange earnings, accounting, even after substantial declines in the share from the mid-1950's, for closei to two-thirds of the value of total exports., With a maxirumi prospective gro-wth of coffee expof't easeinings of 2.5 percent per year as a result of the total world supply-demuad telationships in this camuoxity, it is obvious that the maintenWace of ai *4kMrVe rate of  growth of the econcay is depelident on a ;substantiaL exansion of other exports, en March 1967 a basic change in the country's foreign exchange reginie was enacted to stimulate such an exf,anoion df exports. Through a flexible exchange rate which would depreciate in relation to the move- ment of internal prices, in addition to subsidies, special credits, and promotional services, it was hoped that the goal would be achiered of raising "minor" exports, i.e., exports other than coffee and petrolewnu from a level of US $128 million in L966 to $300 rr,lllon by 1970, ccnpared to the projected value of coffee exports of $3140 .rillion in the latter year. Even with such high sights for -export diversification, a current balence of payment,s deficit was projected for 1967-1970 of P.bout double the de:ficits incurred in 96L-1966, in order to support a national economic growth target of 6 percent per year. Cvloinbia will depend on foreigon aid to achieve the closing of this gap. With a population growth rate of 3.2 percent per year, a growth rate of 6 percent is necessary in order to achieve an adequate increase in income per capita. During the pefriod since 1950 the growth rate has averaged substantially less than that, amounting to 4.6 percent per year both over the entire period 1950-1966 and during the recent interval 1961-1966. Agriculture, although declining relative to total national *outputi still accounts for about 30 percent of the total. The growth of agrLcultural output has been slightly lower than that of population, though it has been held back by a very slow growth of output of coffee. Excluding coffee, the agricultural. slhowinig has been slightly higher than that of population growth. Many factors are responsible fGr the lagging growth of agriculture, but among the outstandang ones have been the patterns of land tenure and use. The larger part of landholdings is  accounted for by a small part of the population, and this has been accompanied by a tencdency toward extensive rather than intensive utilization of land. This has had an adverse affect with respect both to expansion of agricultural output and the provision of employmerit opporturities in agriculture for the growing population. Symptomatic of these conditions is the extent of under-aloyment in rural areas and iinemplo3ment in the cities. In recognition of this situation, a land reform law was enacted in 1961 and an active land reform institute, TNCORA, was entrusted with its adminictration, The extent of land redistribution activities by INCORA has, however, been limLttdLn During its first five years of operations, fewer than 10,O000 families a year benefited from INGORA's land distribution program, compared tp a growth in farm families estimated at about hO,000 per year. INOORA attributes its difficulties to ColombizQis poor soils and the unsuitability of many of the large landholdings for intensive exploitation. Althogh manu.factaring output has increased at a higher rate than both agriculture and total outpuZt in Colombia, it has eqp4mded employment at a much lower riate than output, because of its capital- intensive nature and low level of capacity uti4Vization. The growth of exports of manufactures is hampered 'by the hi4hcosts of many manufacturing activities, which have been protected 'frtm for4gn ccmnpetition largely as a by-product of balace of payments imort restrictions. The employment problem resulting fram the nature and ipace of agricultural and industrial growth i.n the country bears signiticantlr on the coffee adjustmert and diversification prOloiop. The problov of provid;ing alternative employment to resources engaged in surplus coffee Mroduction adds to an alr eady stiubborn general prob2em of creation of .emTh-oyment opportunities in conne.tion with the rerall development of li*w (eponcmy.  ee Coffee ector Colombian coffee production at a- level of about 8 million bags per year has undergone virtually no change during the past decade. The long-term growth rate since the early 1930's works out at slightly more than 2 percent per year. There i8 little conclusive evidence on the trend of area planted to coffee., which is how estimated to amount to about 1 million hectares, hat it has apparently been stagnant or declining over the last ten years. There is similarly no evidence of significant change during that period in the estimated 2 billion coffee trees in the country. As of 1962/63, 60 percent of the coffee trees were over 15 years old, and should therefco,e have declining yields. It is believed that the rate of replanting is low, and therefore no significant change should be expected in the number or age composition of trees. Close to three-fourths of total output comes from the west central section of the country, where coffee is cultivated on the slopes of the western and central ranges of the Andes mountains, Coffee was first introduced into the country to the east and north-east of this central region, but has historically shifted to the west central area. This regiorn has the highest yields per unit of area, and is the best endowed in the country ecologically, for coffee cultiv.tion, with an optimum altitude range of 1,300-1,800 meters, and with much of the coffee lands on steep slopes. With a considerable range of climates in coffee producing regions, there is little annual fluctuation in output; adverse weather conditidns in some regions tend to be offset by favorable conditions in others.  -vi- Coffee cultural practices are siple and highly labor-intensive. The national average yield ts about ',00 kilos of green coffee equivalent per hectare, but the potentials for increased yields are very great. An outstanding characteristic of coffee cultivation in Col,mbia is the small size of many of the farms. About one-third of' the more than 300(,000 coffee farms have less than 1 hectare each, and there has b>on a trend of deline in the average size of farm. The smallest farms cultivate coffee over most of their area, with an inverse re-lationship betwbh the size of farm and the proportion devoted to coffee. The smallest fax~s also tend to be on the steepest lands, and consequently ofter the most li'nited possi- 1ilities for alternative activities. Monetary returns to toffee tultivation are estimated et some 3,800 pesos/ 'per hectare at the nationAl aVerbage yield5 cbuhting labor as a return rather than a cost, and making no allowance for d-piSciation of investment 'This works out to 29.2 pesos per man-day for 130 man-days of labor requiYed to produce the aviera& output per hectate i5 a year. Margins increase more than proportionately with increase's ih yields. In one extreme case of a fhrm visited by the miaaion, in which the most adfraiced cultiyation technbques are applied, th'e yield is &8 muph as 7,000 kilos per hectare, and the return on invostment is estimated to be as high as 66 perqent. Changing over to the advanced production practices (new varieties of trees, high density per unit of area, heAVy application of fertilizers, and growth without shade) requires investminnt, and is held back because of the high cost of eredit Ai the risks iiolJAed in sch investment. 1/ 16.25 pesos US $1.  The L0-year old National Federation bf Coffee Growers, a private bodyv representing the interest or' doff6e producers, Is the pivotal agency in the carrying out of the coffee policy of the country. This agency constitutes a remarkable exaMple of organization and stabiLity. It has had $nly two general manager.; duriiTh its entire history, and employs some 2,800 persons. By arrangeiient with the government, it car,ries out Colombiats obligations urnder the International Coffee Agree- ihent. tts pur6hases 6f coffee, amounting to 60-70 percent of the total crop, at support prices fixed in agreement with the government,, constitute the basi c factor in internal price policy. The Federation is the agency which buys and sicores surpluis coffee, which it finances primarily through the proceeds of a 19 percent "coffee retention" tax, entrusted to it by the government for this purpose. The Federation's storage facilities for coffee represent close to half of the country's total storage capacity for agricultural products. The Federation support piice for coffee is fixed by a cammittee consisting of the Federation's General Manager, the Manager of the Central Bank, and three Ministers of the National Govermnent - Finance, Agriculture, and Development. The price is, of couirse, influenced greatly by the level of taxation, which is applied at the point of export and amounts to slightly more than 40 percent of the excp)ort value, including the 19 percent "retention" tax. The principal element in taxation besides the retention tax is anesport tax, which now (February 1968) amounts to 22.25 percent. The export, tax was imposed in March 1967 at the time of basic modification 6f the exchange regime, in replacement of a penalty export rate that applied to coffee; it was initially established at a rate of 26 percent, with the provision that it was to decline by one-fourth of 1 percentage point per month until it settled at 20 percent in December 1968. At the same time,  the export rate applicable to ooffee was established as the same "certificate" ritLe applir;ab.l r to q-.orts; generally,, and the certificate rate was left to fluctiur-ite in the market. Thus, while the export tax rate was to decline steadily., the peso proceeds from coffee exports by virtue of the exchinge rate were also to Increase; indleed the certificate rate rose by 20 percent fromn 13.50 pesos per dollar in March 1967 to 15.70 pe6cs in November 1967. The Federation support price .Ccr coffee was raised by scne 18 percent during that period. The rationale for this poiLicy is to improve the terms of trade for coffee producers relative to their position in 1962., and to keep private exporters fr,cm selling too cheaply in international markets. The goverrnent is aware of the need, however, to balance against these objectives the undesirable effect of i.ncentives for expansion of coffee output. The net effect of the opposing tendencies of supporting the inccrie of coffee growers and applying a high irate of taxation on coffee exports, which have been at work for sane time, has been the low rate of growth in coffee outout. Colombia nevertheless has accumulated substan'tial surplus stocks of coffee. The stocI% accumuilation is reported to havne begun in 1959/60, and to have risen to 5.3 million bags at the beginning of the coffee year 1967/68, i.e., as of October 1, 1967, of which some 4.7 million bags are c onpidgred to be purplus. The annual average accumulation during the 8&year period 1959/60-1966/67 was about 600,000 bags, though the rate o