Puerto Rico: Investing in coffee

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Features

SAN JUAN, Puerto Rico

Story and photos by Larry Luxner

Tucked away in a suburban industrial park, and wedged among an electronics shop, an air-conditioning distributor, and a maker of industrial equipment, Gustos Coffee Co. runs one of Puerto Rico’s most eclectic coffee shops — as well as a roasting plant aimed at satisfying the indulgences of demanding local coffee drinkers.

Omar Torres, president of Gustos, has been in business since 1999 and now focuses on specialty coffee, even though the industry itself is going through hard times.

“Coffee has been in decline here for the past eight years, and the last five years have been even more dramatic,” said the 51-year-old businessman.

“The biggest problem in the last decade is the world economy and oil prices, which have raised the cost of growing coffee on the island. Oil prices have come down now, but over the last 10 years when they were going up, it affected the cost of fertilizer and insecticides. Farmers were losing money but the government didn’t raise coffee prices to keep up. Even so, our company has been growing every year no matter what,” Torres said in a recent interview here, though he declined to discuss revenues.

ALSO: Hacienda Lealtad Plans Boutique Hotel

Gustos has 75 employees and two 12,000-sq.-ft. warehouses in San Juan and Ponce, making it a rising star in the local coffee industry, which spans nearly two centuries. Yet in the annals of Puerto Rican history, 1896 is particularly memorable.

That year, according to Luis Pumarada O’Neill’s La Industria Cafetalera de Puerto Rico: 1736-1969, the industry reached the pinnacle of its success, ranking as the world’s sixth-largest coffee exporter and shipping a record 579,613 quintales (a measurement equivalent to 100 lbs., abbreviated as qq) of locally grown beans to sophisticated coffee drinkers throughout Europe. For a time, the Vatican imported Puerto Rican coffee for the exclusive consumption of its popes and cardinals.

Since then, production has fallen dramatically, to 113,000 qq in 2012 and only 40,000 qq last year — with only 1,000 to 2,000 qq of that exported.

The industry’s decline coincides with a dramatic exodus of Puerto Ricans to the US mainland; in the past decade, more than 500,000 of the island’s 3.9 million inhabitants have left as the island’s government, nearly $70 billion in debt, suffers one of the worst financial crises in recent history.

“Right now, we are indeed drinking less coffee in total than we were drinking 15 years ago,” said Germán L. Negrón González. The industry veteran estimates that Puerto Rico’s total coffee consumption has fallen by 28% in volume and 22% in per-capita consumption (to around six pounds per person per year) since 2000.

Even so, the island still consumes about six times as much coffee as it produces, with one company — Puerto Rico Coffee Roasters — controlling nearly 80% of the island’s coffee market.

Negrón, 38, is general manager of PR Coffee Roasters, which in 2010 bought the illustrious Alto Grande coffee brand from Suiza Dairy, itself a subsidiary of Peru’s Grupo Gloria. His company buys beans from about 1,700 growers at $300 to $320 per quintal,  and processes well over half the island’s total coffee production.

“Last year’s crop was the lowest ever, but I see a lot of optimism and good things coming,” Negrón said over a traditional Puerto Rican lunch in the mountain town of Lares. “This crop will be larger than the last one, and next one will be even larger. People have been planting a lot, especially since last year.”

PR Coffee Roasters, the product of a 2010 consolidation of three companies — Café Encantos, Café Yaucono, and Café Crema — is headquartered in the San Juan suburb of Bayamón. The company owns a 270-acre farm in Maricao and a 1,000-acre farm in Manatí (the latter had been used by the Land Authority of Puerto Rico to grow pineapples, but had been abandoned for 15 years) as well as roasting and manufacturing facilities in the southern port city of Ponce.

Puerto Rico has about 4,000 coffee growers, with cultivation concentrated in 22 of the island’s 78 municipalities. The leading coffee producing municipality is Adjuntas, followed closely by other nearby mountain towns.

“Coffee is the only product for which growers are 100% guaranteed that the government or private sector will buy their product. They know they will sell 100% of what they produce. It’s a strength for the industry to have a guarantee that all the coffee you produce will be purchased,” said Negron, who started Café Encanto as a university project and has been in the business for 16 years.

“We have decided that since we need the raw materials, our company cannot rely on any product that comes from outside. We need coffee to be produced locally. For that reason, we started planting coffee very aggressively. We also knew we needed new varieties and new technologies, and to transfer those technologies to the growers,” he said.

Negrón said average yield in Puerto Rico is 3-4 qq per acre, far less than the ideal yield of 15 qq per acre.

“We don’t need more acres of coffee; we need to be more productive with the acres we have,” he said. “No matter what price you pay growers for their coffee, if they are not productive or don’t have the right varieties or the technical knowledge to deal with the soil, they will never get to that level.”

Down the road from Negrón’s Lares operations is Café Hacienda Lealtad — which currently represents one of Puerto Rico’s largest investments in coffee production.

The complex, just off Highway 128, comprises processing, roasting and packaging all under one roof. The company is headed by Edwin Soto — a 53-year-old San Juan businessman and president of the Puerto Rico Farm Bureau’s coffee division — and managed by his older brother, Baltasar Soto of Lares.

Heading Hacienda Lealtad’s operations is Bayron Aranda Suárez, a Colombian coffee consultant from Medellín who arrived in Lares a few months ago to supervise the company’s $15.5 million investment in cultivation, processing, roasting and packaging.

Suárez said this investment envisions, among other things, the planting of 1,000 acres with up to a million coffee trees. At present, Hacienda Lealtad has 600,000 trees.

The company also intends to boost its workforce to 60-80 employees, with another 500 people working seasonally — and in December it will open a boutique hotel near Lares for tourists curious to learn about the coffee cultivation process (see sidebar).

“Our medium-term plan is to supply coffee farmers with these plants and help provide financing to get their plantations running, so they’ll turn to us first,” Suárez told STiR magazine as he led a tour of one of the company’s viveros, or nurseries. “We also want to create an alliance with coffee farmers that will bring to this company their coffee for processing. We want to add value, and the farmers will get a small premium.”

Eventually, Hacienda Lealtad hopes to export green coffee to the US mainland as well as to Italy, Japan, Canada, and China, among other markets. It will introduce a second brand, Café DiLaris, to the local market in coming months and also plans a chain of specialty coffee shops that will sell about 5% of Hacienda Lealtad’s total production,

But, as Negrón of PR Coffee Roasters explains, specialty coffee is a tricky thing.

“As with any product, specialty coffee will always be a small percentage of total production. You cannot base your industry strategy on 70% specialty production; it won’t happen,” he said. “What we always said is that we need to increase the overall production base. So if we’re at 10% specialty coffee production and we produce 40,000 quintales, that means 4,000 quintales of specialty coffee.”

For now, Negrón’s company employs 250 people, 120 of them directly involved in farming and sells 15 million pounds of coffee a year.

“When your farms are well-maintained and have healthy production, you will not have problems finding pickers,” said the businessman, whose nursery boasts one million seedlings. Last season, he advertised online for coffee workers and ended up registering 2,000 laborers who worked four to five hours a day, earning $8 to $10 per hour.

Production from year to year has varied wildly, often depending on whatever government policies were in effect at a given moment.

Following Hurricane Georges, which struck Puerto Rico in 1998 and ravaged coffee trees, production fell to 150,000 qq. But two years later, the commonwealth government began offering incentives, including providing seedlings to farmers for 5 to 10 cents apiece. It also provided subsidized fertilizer and machinery, boosting output to 225,000 qq by 2004.

“But in 2005, the government did the exact opposite. They increased the prices paid to coffee growers but cut fertilizer subsidies in half, and stopped giving seedlings,” said Negrón. “They also prohibited growers from planting robusta, and encouraged them to grow arabica instead, following the example of some Central American countries that only plant arabica. The year after, they reversed that order, so it didn’t last long.”

At present, he said, about 6,000 of Puerto Rico’s annual production of 40,000 qq is robusta. Interestingly, in the late ‘80s and early ‘90s, island farmers began cultivating two arabica varieties — limaní and frontón — that tolerate coffee rust disease, known in Spanish as la roya. But a change in government policy led farmers to go back to the more traditional bourbon and typica varieties that were planted in the 1950s and which are not resistant to la roya, which began attacking local coffee trees about three years ago.

This, say industry leaders, is why the government needs to stop going back and forth when it comes to agricultural policy. Last year, Edwin Soto warned that the Puerto Rico Department of Consumer Affairs (known by its Spanish acronym DACO) would endanger thousands of jobs in rural areas by its decision to pay $379/qq for local coffee and $322/qq for imported beans in order to keep supermarket prices low.

“That puts 20,000 jobs at risk and will replace quality local coffee with coffee of lesser value,” Soto told reporters at the time, warning that the price disparity would discourage roasting companies from buying Puerto Rican coffee beans.

Added Negrón: “We still have a local market we need to satisfy. If we have consistent policies with the right varieties, we can increase production and fulfill local needs. Once we get to that point, we can start looking again at exports.”

Back in San Juan, Torres — the owner of Gustos Coffee — is enjoying another espresso at his rotating cupping table.

“We now focus on specialty coffee and are involved in every aspect of the business, from office coffee service to cafeterias, panaderias and restaurants,” said the entrepreneur, whose family has owned restaurants both here and in the US Virgin Islands. Today, 95% of Gustos Coffee’s revenues come from food service.

“From the day we started, our focus has been on having the best coffee possible. Because of that, in the beginning we didn’t roast coffee. But I realized that I was not able to get the coffee I wanted on a consistent basis,” said Torres. The company soon began growing its own coffee in Yauco, and now packages coffee under the Casa Grande label.

Just over three years ago, Torres — who studied hotel and restaurant management at Michigan State University — opened his Gustos Café boutique coffee shop.

Few coffee connoisseurs would mistake this place for a Starbucks. For one thing, its décor is rather unusual, ranging from the bright orange portafilter door handles at the entrance to its rustic atmosphere, complete with antiques such as a 1970 Vespa motorcycle hanging from the ceiling, a huge industrial coffee grinder from the early 1950s and a small portable Remington typewriter dating from before World War II.

Behind the counter, skilled baristas like Viviana Cruz and Gioella Malatrasi make espressos and pourovers as they happily chat with customers, many of whom work at La Telefónica, Triple-S Insurance and other nearby businesses off Avenida F.D. Roosevelt.

The café also features breakfast fare such as oatmeal, fresh fruit, and egg dishes, and for lunch, mostly wraps — as well as a private room where barista classes are given.

“The front of the house is a showpiece,” Torres said as he walked through his enormous warehouse full of espresso machines and coffee equipment awaiting delivery to clients or undergoing repairs.

Torres is not shy when it comes to offering opinions on why the island’s coffee industry is in decline.

“In order for Puerto Rico’s coffee industry to be successful, we need to find a way to consistently export,” Torres told STiR. “But for now we’re focusing on the local market. It makes no sense to export today and not be able to export tomorrow.”

A big part of the problem, he said, is protectionism, which has prevented Puerto Rico from developing exports in the way Costa Rica, Hawaii, and Jamaica have done so.

“Puerto Rico has suffered because of excessive government controls over the years. Puerto Rican and Hawaiian coffee are very similar in quality and taste, yet Hawaii did not have the protections Puerto Rico had. Therefore, it used market strategies to promote Hawaiian coffee worldwide over the last 50 years. They found a way to survive,” Torres complained. “The fact is that for coffee farmers to survive, we need the export business. Yet we’ve allowed 50 years to go by without marketing our coffee, and now farmers have no need for great coffee to export because they can sell it locally.”

In contrast, Hawaii sells its beans for $10 a pound, and Jamaica for $40 a pound.

Puerto Rico, on the other hand, can’t even produce enough coffee to satisfy local consumption, so the government must import about 250,000 qq of beans annually from Mexico. Because of price controls, imported coffee is now cheaper here than local coffee.

In the long term, a bigger problem is the island’s perennial labor shortage when it comes to coffee, since the industry is prohibited from importing low-cost workers from the Dominican Republic or other countries.

“Nobody wants to pick coffee beans. They’d rather just be on welfare,” said Torres, adding that “the best pickers are more than 60 years old. They’re the type of people willing to wake up at 5 a.m. and work until noon, or until they make $25 and they’re happy. Today’s youth don’t have that mentality, so we worry what’s going to happen in the future.”

Larry Luxner, a Tel Aviv-based journalist and photographer, lived in Puerto Rico from 1986 to 1995. He returned to the island for five days in August to research this article.