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Cablegate: Colombia's Small Farmers--Cooperation and Credit

VZCZCXYZ0145
RR RUEHWEB

DE RUEHBO #8273/01 3321753
ZNR UUUUU ZZH
R 281753Z NOV 07
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 0310
INFO RUEHBR/AMEMBASSY BRASILIA 7920
RUEHCV/AMEMBASSY CARACAS 9590
RUEHPE/AMEMBASSY LIMA 5666
RUEHZP/AMEMBASSY PANAMA 0902
RUEHQT/AMEMBASSY QUITO 6357

UNCLAS BOGOTA 008273

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON ETRD EAID CO
SUBJECT: COLOMBIA'S SMALL FARMERS--COOPERATION AND CREDIT
KEY IN GLOBALIZED ECONOMY

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Summary
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1. Historically large agricultural producers in Colombia
have benefited from government largesse to the exclusion of
small farmers. Despite government institutions intended to
help them get loans, small farmers often must turn to the
informal lending system where they pay interest rates in
excess of 100 percent. To remedy the situation the GOC has
tripled loan subsidies to small farmers in the last four
years to a projected USD 300 million in 2007 and recently
started a USD 100 million assistance fund to make small
farmers more competitive. Still, small farmers are unlikely
to survive in a globalized economy unless they work together
cooperatively. The Colombian coffee growers federation
offers a good model of how small farmers can thrive in a
cooperative association. The impact of U.S.-Colombia Trade
Protection Act (CTPA) on basic grain producers should have
substantially less negative impact on small farmers, the
majority of whose crops are for subsistence consumption.
Reduced grain prices will benefit the urban poor as well as
the livestock sector which depends on grains for feed. The
CTPA offers Colombia the opportunity to develop its
comparative advantage in tropical agricultural products,
where small farmers are better poised to compete. End
Summary

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A Focus on Big Agriculture...
-----------------------------

2. Colombia's agricultural system historically channeled
government benefits to a small number of beneficiaries.
Powerful agricultural groups lobbied for legislation that
benefited large producers and absorbed the bulk of government
credit. As a result government incentives supported a high
rate of growth among large producers relative to most
developing countries (just under 4 percent from the
1950s-1990s). Recognizing limitations on agricultural
credit, the GOC established three complementary institutions
in the 1990s to help small farmers: Banco Agrario, a bank
that makes agricultural loans; the Fondo para el
Financimiento del Sector Agropecuario (FINAGRO), a
second-tier bank that subsidizes agricultural loans by Banco
Agrario and other banks; and the Fondo Agropecuario de
Garantias, (FAG), a fund administered by FINAGRO to guarantee
such loans.

3. According to Lorena Garnica, special advisor to the
Minister of Agriculture and Rural Development (MinAG), all
three institutions have had trouble meeting the needs of
small farmers. Despite its development mission, Banco
Agrario has favored profit-making by focusing on risk-adverse
investments. The bank invests over half its USD 4.5 billion
equity in government bonds and most of the rest in relatively
safe loans to large agricultural producers. FINAGRO and FAG
also have had problems helping small farmers. FINAGRO
subsidies are overly concentrated in a small number of Banco
Agrario loans or loans to large agricultural producers.
FAG, with a guaranteed income source from FINAGRO profits,
lacks incentive to carefully manage its own resources. Until
recently, FAG simply guaranteed 100 percent of most Banco
Agrario loans without any risk analysis. Not surprisingly,
its default rate has hovered between 25 and 30 percent.

------------------------
Leaves Small Farmers Out
------------------------

4. Despite a bank devoted to agriculture development,
subsidized agricultural loans, and loan guarantees, small
farmers still have trouble accessing credit. Luis Criales,
the president of FINAGRO, explained that banks do not like to
make loans to small farmers because administrative costs
usually outweigh any income they might earn for banks,
regardless of discounts and guarantees. Even when banks make
loans to small farmers, processing them can take six or more
months -- time that small farmers who need money to plant
crops usually do not have. Criales said therefore government
assistance usually goes to large agricultural producers --
who often use it to restructure existing private sector loans
on more favorable terms. The system forces small farmers
into the informal lending system with interest rates in
excess of 100 percent. Criales said this has stifled the
agricultural system, which has grown at a significantly
slower pace in recent years than the Colombian economy as a
whole (2.4 percent versus 7.5 percent in the first half of

2007).

-------------------------------------
New Programs to Help Small Farmers...
-------------------------------------

5. The GOC is working to adjust the agricultural credit
system to offer greater assistance to small farmers. FINAGRO
tripled subsidies on loans to small farmers since 2003, from
USD 100 million to USD 300 million. Over 100,000 small
farmers received loans subsidies in 2007, representing 80
percent of all FINAGRO subsidies. In 2007 the MinAg started
the USD 120 million "Agro, Ingreso Seguro" (AIS) program to
increase small and medium farmer competitiveness. AIS's
largest component provides USD 35 million for risky projects
with high social returns, such as helping displaced persons
develop a farming business. AIS also allocates USD 30
million (USD 10 million earmarked for small farmers) to
subsidize loans for agricultural exports and USD 30 million
to help small farmers repay up to 40 percent of loans for
export projects.

6. One of smallest, but most important, aspects of AIS
provides USD 7 million in technical assistance for small and
medium sized farmers (assets up to USD 300,00). Ivan
Estaban, a consultant who helped develop and implement AIS,
said technical assistance will help small farmers overcome
their biggest obstacle: knowing what programs are available.
Small farmers can get advice on farming practices, obtaining
loans and getting other assistance, including AIS programs.
Under the program, small farmers will be able to "hire"
private technical consultants paid for by AIS.

--------------------------------------------- ----
But Agricultural Cooperatives Still the Way to Go
--------------------------------------------- ----

7. Rafael Mejia, head of the Sociedad de Agricultores de
Colombia (SAC), an umbrella association of all agricultural
producers, said AIS will increase agricultural
competitiveness for farmers of all sizes. He noted that AIS
will play a particularly important role in rural areas,
typically poorer and with lower levels of infrastructure and
education, where agriculture is the single most important
economic activity. One-half of all rural households have at
least one family member involved in agriculture.

8. Still, Mejia thinks small farmers will not survive in a
modernizing economy unless they work together in cooperative
associations. Criales agrees that agriculture cooperatives
represent the best chance for small farmers and noted that
FINAGRO has started working directly with cooperatives, such
as a program to subsidize loans from agricultural
cooperatives to small farmers. FINAGRO now considers small
farmers in a cooperative as a single small farmer (for the
purpose of getting a better loan subsidy), even if their
collective assets qualify them as a medium or large farmer.

---------------------------------------------
Coffee: A Model for Competitive Small Farmers
---------------------------------------------

9. Gabriel Silva, head of the Federacion Nacional de
Cafeteros de Colombia (FedeCafe), said the coffee industry
shows how successfully small farmers can work together.
Although he thinks AIS will do a "great job bringing more
financing to the rural sector," Silva pointed out that the
coffee industry, which represents 30 percent of agricultural
employment and 25 percent of agricultural GDP, has
successfully competed internationally for almost 100 years
through cooperative association. 90 percent of Colombia's
560,000 coffee growers are small farmers with plots less than
three hectares (7.5 acres). FedeCafe members contribute to a
common fund which pays 1,100 experts to provide technical
assistance, build infrastructure, and make loans to small
coffee growers. Silva said that because they work together,
coffee growers are well positioned to "take advantage of
increased international market access" by expanding into new
export crops. He noted that coffee growers are already
starting to add new crops like corn and asparagus, and that
the income from these crops is rapidly catching up to the
income from coffee.

-------------------------------------------
Colombian Agriculture and the Global Market
-------------------------------------------

10. Colombian and U.S. agricultural markets complement each

other. According to the Institute for International
Economics, Colombia has a comparative advantage in tropical
agricultural products while the U.S. has the advantage in
temperate zone products. Bananas, after flowers and coffee,
consistently ranked as the most significant agricultural
export from Colombia to the U.S. between 2000-2005 (at about
USD 200 million per year banana exports exceeded all
agricultural export products below them combined).
Conversely, between 2000-2005 coarse grains, wheat and
soybeans dominated U.S. agricultural exports to Colombia,
combining for approximately 60 percent of all such exports
and rising in value from USD 250 million in 2000 to 400
million in 2005. The MinAg estimates that with the CTPA's
increased market access, farmers who switch from wheat to the
tropical fruit uchuva would earn enough to buy 70 times more
wheat than they could grow.

11. The typical small farmer, according to Rafael Mejia, has
assets under USD 25,000 and grows a mix of beans, potatoes,
yucca, non-industrial corn and plantain. Mejia noted that
while small farmers represent 80 percent of Colombia's 3.3
million farmers, excluding coffee, they generate only 20
percent of agricultural income. The discrepancy largely
results from small farmers dedicating approximately 65
percent of their production to subsistence consumption. The
remaining one-third of small farm output which is sold does
not typically include products in competition with U.S.
imports, minimizing small farmer vulnerability to negative
impacts of the CTPA.

12. Colombia's large agricultural producers, on the other
hand, typically grow capital intensive crops for domestic
sale which are similar to U.S. exports to Colombia (such as
coarse grains, wheat, and soybeans). Large producers
accordingly face greater exposure under the CTPA. A 2004
study by the InterAmerican Institute for Agricultural
Cooperation estimated, for example, that the CTPA could lower
the price of soybeans in Colombia by 25 percent, causing a
drop in domestic production between 50-70 percent. Even so,
the Institute's analysis noted that the price reduction in
industrial crops generated by the CTPA would lead to gains
that would outweigh losses for Colombian agriculture --
particularly in the livestock industry -- since these crops
are generally used as animal feed.
Brownfield

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