Required Report - public distribution

**Date:** 5/15/2006

**GAIN Report Number:** ES6003

ES6003

**El Salvador**

**Coffee**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Stephen Huete

AgSanSalvador

**Prepared by:**

Miguel Herrera

**Report Highlights:**

Rebounding from a historically low production in MY2004/05, El
Salvador\'s coffee production is expected to increase approximately 2 %
in MY 2005/06, and 4 % above previous estimates. Improved international
coffee prices are providing relief to El Salvador's depressed coffee
sector. Efforts to promote specialty coffee are paying off as exports of
higher quality coffee account for 18 % of total exports. El Salvador has
used activities such as the Cup of Excellence and Q auctions to promote
coffee abroad. In addition, El Salvador had a stand at the 2006
Specialty Coffee Expo where various coffee brands had exposure to
quality coffee buyers. Foreign exchange income from coffee exports is
expected to increase in 2006/07 reaching approximately \$160 million.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

San Salvador \[ES1\]

\[ES\]

Table of Contents

[Executive Summary 3](#executive-summary)

[Production 5](#production)

[Consumption 5](#consumption)

[Trade 5](#trade)

[Policy 7](#policy)

# Executive Summary

El Salvador's 2005/2006 coffee harvest is expected to be approximately 4
percent higher than previously reported. New data provided by the
Salvadoran Coffee Council (CSC) reveals that the 2005/06 harvest is
expected to reach 1.35 million 60 Kg. bags. Lack of financing to carry
out necessary agricultural practices due to carried over debt burden in
the coffee sector continues to negatively affect a sustained production
turn-around. Favorable weather and some increase in fertilizer use are
expected to positively impact production for the 2006/07 harvest. Higher
coffee prices are providing some relief to the sector and assisting in
dealing with carryover debt as well as input investment. However, there
is a large group of producers that are selling their properties to be
able to honor their debt.

Coffee exports in 2005/06 are expected to reach 1.33 million bags.
Expected higher production in 2006/07 will increase export numbers.
Local financial institutions continue to require farmers to have a
planned coffee-sales program in order to have access to loans. This
requirement is forcing farmers to forward contract their coffee and
avoid speculation. Germany is the main export destination for Salvadoran
coffee, accounting for 34.8 percent of MY 2005/06 exports through April
2006. In MY 2006, exports to the U.S. are expected to reach 440,249
sixty Kg. bags. Exports to Canada have more than doubled in MY 2006.
Other important markets continue to be Belgium, Japan and France.

Lack of local ground coffee processing facilities has favored the market
for soluble coffee. This has led to continued increase in soluble
imports mainly from Brazil and Nicaragua. Guatemala's coffee has also
reached the retail and institutional market.

The CSC continues to monitor exports through the use of export
registrations permits. The GOES has guaranteed through the
Multi-Sectoral Investment Bank (BMI) a loan of \$ 32.00 per
hundredweight (cwt) to cover routine maintenance and harvesting during
the 2006/07 crop. Coffee is still the most important source of
employment in rural areas, with the coffee harvest alone providing
approximately 130,000 jobs. Coffee is no longer the major source of
export revenues in El Salvador. Exports of non-traditional products such
as processed food products and tropical fruits are carrying export
revenue growth. Family remittances from Salvadorans residing in the U.S.
on the order of \$2.8 billion in 2005 are also helping the country's
economy remain afloat. Coffee exports in 2006/07 are expected to
generate approximately \$160 million in foreign exchange.

El Salvador continues to promote Salvadoran coffee focusing mainly on
Specialty and Gourmet qualities (See Trade). The agricultural sector is
the highest growing sector in the economy assisted by higher coffee
prices and increased market access for sugar under the Central America
-- Dominican Republic (CAFTA-DR) free trade agreement.

+---------------------+-----+------+-----+------+-----+------+------+
| **El Salvador**     |     |      |     |      |     |      |      |
|                     |     |      |     |      |     |      |      |
| #####               |     |      |     |      |     |      |      |
| # **Coffee, Green** |     |      |     |      |     |      |      |
+---------------------+-----+------+-----+------+-----+------+------+
|                     | **  | **R  | **  | **Es | **  | **Fo | **U  |
|                     | 200 | evis | 200 | tima | 200 | reca | OM** |
|                     | 5** | ed** | 6** | te** | 7** | st** |      |
+---------------------+-----+------+-----+------+-----+------+------+
|                     | **U | **   | **U | **   | **U | **   |      |
|                     | SDA | Post | SDA | Post | SDA | Post |      |
|                     | Of  | Esti | Of  | Esti | Of  | Esti |      |
|                     | fic | mate | fic | mate | fic | mate |      |
|                     | ial | \    | ial | \    | ial | \    |      |
|                     | \[O | [New | \[O | [New | \[O | [New |      |
|                     | ld\ | \]** | ld\ | \]** | ld\ | \]** |      |
|                     | ]** |      | ]** |      | ]** |      |      |
+---------------------+-----+------+-----+------+-----+------+------+
| ######              |     | 10/  |     | 10/  |     | 10/  | MM/  |
| # Market Year Begin |     | 2004 |     | 2005 |     | 2006 | YYYY |
+---------------------+-----+------+-----+------+-----+------+------+
| **Area Planted**    | 176 | 176  | 176 | 176  | 0   | 176  | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | HA)  |
+---------------------+-----+------+-----+------+-----+------+------+
| **Area Harvested**  | 164 | 164  | 164 | 164  | 0   | 164  | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | HA)  |
+---------------------+-----+------+-----+------+-----+------+------+
| **Bearing Trees**   | 541 | 541  | 541 | 541  | 0   | 541  | (MIL |
|                     |     |      |     |      |     |      | LION |
|                     |     |      |     |      |     |      | TR   |
|                     |     |      |     |      |     |      | EES) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Non-Bearing       | 53  | 53   | 53  | 53   | 0   | 53   | (MIL |
| Trees**             |     |      |     |      |     |      | LION |
|                     |     |      |     |      |     |      | TR   |
|                     |     |      |     |      |     |      | EES) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Tree        | 594 | 594  | 594 | 594  | 0   | 594  | (MIL |
| Population**        |     |      |     |      |     |      | LION |
|                     |     |      |     |      |     |      | TR   |
|                     |     |      |     |      |     |      | EES) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Beginning         | 2   | 2    | 2   | 2    | 0   | 3    | (    |
| Stocks**            |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Arabica           | 1   | 1329 | 1   | 1359 | 0   | 1400 | (    |
| Production**        | 258 |      | 300 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Robusta           | 0   | 0    | 0   | 0    | 0   | 0    | (    |
| Production**        |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Other             | 0   | 0    | 0   | 0    | 0   | 0    | (    |
| Production**        |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL             | 1   | 1329 | 1   | 1359 | 0   | 1400 | (    |
| Production**        | 258 |      | 300 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Bean Imports**    | 25  | 28   | 25  | 25   | 0   | 23   | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Roast & Ground    | 3   | 3    | 2   | 8    | 0   | 7    | (    |
| Imports**           |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Soluble Imports** | 96  | 95   | 105 | 95   | 0   | 98   | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Imports**   | 124 | 126  | 132 | 128  | 0   | 128  | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL SUPPLY**    | 1   | 1457 | 1   | 1489 | 0   | 1531 | (    |
|                     | 384 |      | 434 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Bean Exports**    | 1   | 1309 | 1   | 1327 | 0   | 1360 | (    |
|                     | 237 |      | 286 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Roast & Ground    | 1   | 1    | 1   | 1    | 0   | 1    | (    |
| Exports**           |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Soluble Exports** | 2   | 2    | 2   | 2    | 0   | 2    | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Exports**   | 1   | 1312 | 1   | 1330 | 0   | 1363 | (    |
|                     | 240 |      | 289 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Rst,Ground Dom.   | 28  | 28   | 28  | 30   | 0   | 32   | (    |
| Consum**            |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Soluble Dom.      | 114 | 115  | 115 | 126  | 0   | 133  | (    |
| Consum.**           |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Dom.        | 142 | 143  | 143 | 156  | 0   | 165  | (    |
| Consumption**       |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **Ending Stocks**   | 2   | 2    | 2   | 3    | 0   | 3    | (    |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL             | 1   | 1457 | 1   | 1489 | 0   | 1531 | (    |
| DISTRIBUTION**      | 384 |      | 434 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | 60   |
|                     |     |      |     |      |     |      | KG   |
|                     |     |      |     |      |     |      | B    |
|                     |     |      |     |      |     |      | AGS) |
+---------------------+-----+------+-----+------+-----+------+------+

# 

# 

# Production

New production numbers compiled by the Foreign Agricultural Service
(FAS) office in San Salvador revealed that the 2005/06 coffee harvest is
expected to reach 1.35 million 60 Kg. bags. This is a rebound from the
historically low production posted in the previous season. Higher prices
for Specialty coffee are providing fresh capital for additional
investment in cultural practices as well as in agricultural inputs.
Favorable weather conditions and increased investment due to improved
coffee prices are expected to lift production in 2006/07 by
approximately 3 percent compared to 2005/06.

The Government of El Salvador (GOES) continues to guarantee loans to the
coffee sector. Improved agricultural practices carried out last season
are expected to have a positive impact in 2006/07 coffee yields.

Value-added coffee production such as gourmet, specialty, fair trade and
organic are providing additional revenue to coffee producers. Specialty
coffee production has steadily increased reaching approximately 18 % of
total production in MY 2006. Recently, the CSC organized the fourth
\"Cup of Excellence\" promotional event to increase exposure of fine
Salvadoran coffees in the specialty market. In addition, the CSC is
promoting trade missions composed of European and American specialty
coffee bars to sample Salvadoran coffee. (Refer to Trade for further
information).

# Consumption

New data compiled by the CSC shows an increase in domestic coffee
consumption. Increased availability of coffee brands at the retail level
is providing a positive impact to consumption. In addition, there is a
trend for coffee bars to be located in major shopping malls. In 2005/06,
consumption increased to 156,000 sixty Kg. bags. Most local consumption
has shifted to soluble coffee that is mainly imported from Brazil,
Nicaragua and Mexico. In 2005/06, soluble domestic consumption is
expected to reach 133,000 sixty Kg. bags Green Bean Equivalent (GBE).

In 2006, the CSC contracted a marketing consultant firm to assist in
improving sales and consumption of local coffee. El Salvador, as is the
case in most coffee producing nations, only consumes approximately 3
percent of local production. So there is room to grow local usage as
well as to promote the unique specifications of Salvadoran coffee in the
export market.

# Trade

Coffee export for 2005/06 is estimated at 1.33 million bags. This number
is higher than previously reported mainly due to a larger coffee crop.
In 2006/07 coffee exports are forecast at 1.36 million 60 Kg. bags.

Exports to the U.S. in MY 2005 accounted for approximately 32 percent of
total exports, reaching 429,590 sixty Kg. bags. Germany has surpassed
the U.S. as the main destination for Salvadoran coffee with
approximately 35 percent of total exports. Other active buyers in this
market are Canada, France, Belgium and Japan.

Premium prices obtained by gourmet and specialty coffees have increased
the amount of exports of this type of coffee. The CSC, assisted by
USAID, sponsored for the fourth year in a row the promotional event
called the "Cup of Excellence". The best coffees produced in El Salvador
are selected by local and international coffee connoisseurs to
participate in a global electronic auction. Local coffee was
successfully sold to U.S., Japanese and European buyers with prices
higher than spot Contract C prices.

+-----------------+----------------+----------------+----------------+
| **Export Trade  |                |                |                |
| Matrix**        |                |                |                |
|                 |                |                |                |
| **El Salvador** |                |                |                |
|                 |                |                |                |
| **Coffee,       |                |                |                |
| Green**         |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Time Period** | **MY**         | **Units:**     | **60 Kg.       |
|                 |                |                | Bags**         |
+-----------------+----------------+----------------+----------------+
| **Exports       | **2005**       |                | **2006**       |
| for:**          |                |                |                |
+-----------------+----------------+----------------+----------------+
| U.S.            | 429,590        | U.S.           | 440,249        |
+-----------------+----------------+----------------+----------------+
| **Others**      |                | **Others**     |                |
+-----------------+----------------+----------------+----------------+
| Germany         | 462,840        | Germany        | 474,324        |
+-----------------+----------------+----------------+----------------+
| Canada          | 99,750         | Canada         | 102,225        |
+-----------------+----------------+----------------+----------------+
| Japan           | 98,420         | Japan          | 100.862        |
+-----------------+----------------+----------------+----------------+
| Belgium         | 78,470         | Belgium        | 80,417         |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
| ####### T       | 739,480        |                | 757,828        |
| otal for Others |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Others not    | 161,330        |                | 165,173        |
| Listed**        |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Grand Total** | 1,330,400      |                | 1,363,250      |
+-----------------+----------------+----------------+----------------+

# 

The CSC is also actively promoting coffee through trade missions
composed of European, American and Japanese specialty coffee bars that
roam throughout the country's best coffee production sites and get to
sample the unique qualities that Salvadoran coffee provide to a coffee
cup blend.

Nestle has become a major importer and distributor of mainly Brazilian
and Mexican origin coffee. Nicaragua is also very aggressive in the
soluble coffee market and accounted in CY 2005 for 17 percent of total
imports.

Both green and low quality roasted and soluble coffees from Honduras
manage to enter El Salvador through illegal border crossings. In 2005/06
approximately 27,000 bags are expected to be imported illegally from
Honduras. Legally imported roasted/ground Honduran coffee reached 2,500
sixty Kg. bags in CY 2005.

# 

+-----------------+----------------+----------------+----------------+
| **Import Trade  |                |                |                |
| Matrix**        |                |                |                |
|                 |                |                |                |
| **El Salvador** |                |                |                |
|                 |                |                |                |
| **Coffee,       |                |                |                |
| Green**         |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Time Period** | **CY**         | **Units:**     | **60 Kg.       |
|                 |                |                | Bags**         |
+-----------------+----------------+----------------+----------------+
| **Exports       | **2005**       |                | **2006**       |
| for:**          |                |                |                |
+-----------------+----------------+----------------+----------------+
| U.S.            | 2,183          | U.S.           | 2,500          |
+-----------------+----------------+----------------+----------------+
| **Others**      |                | **Others**     |                |
+-----------------+----------------+----------------+----------------+
| Brazil          | 52,668         | Brazil         | 53,700         |
+-----------------+----------------+----------------+----------------+
| Honduras        | 29,600         | Honduras       | 27,000         |
+-----------------+----------------+----------------+----------------+
| Nicaragua       | 21,170         | Nicaragua      | 22,300         |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
|                 |                |                |                |
+-----------------+----------------+----------------+----------------+
| ####### T       | 103,438        |                | 103,000        |
| otal for Others |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Others not    | 22,029         |                | 22,900         |
| Listed**        |                |                |                |
+-----------------+----------------+----------------+----------------+
| **Grand Total** | 127,650        |                | 128,400        |
+-----------------+----------------+----------------+----------------+

# 

# Policy

The GOES continues to offer a 6.0 percent drawback program for
non-traditional exports. This drawback is used by the GOES as an
incentive for exporters that trade their products outside the Central
American region. The GOES through the Ministry of Economy returns six
percent of the taxes incurred in the export transaction back to
exporters. Soluble and roasted coffees are eligible to apply for this
program.

The GOES is providing a loan guarantee of \$32 per hundredweight (cwt)
to cover coffee maintenance and harvesting costs. Farmers contract the
loan with a local bank and the GOES guarantees up to \$15 per cwt if
there is a default.

El Salvador continues to actively participate in International Coffee
Organization (OIC) meetings. The GOES Presidential Commissioner for
Coffee serves as liaison with the coffee sector to deal with regulatory
issues and provide a framework for an export promotion agenda for
Salvadoran coffee. The GOES has set up a program to assist the
agricultural sector (including coffee) called "ProAgro" that includes
investment in agricultural technology and R & D capacity.

The GOES continues providing assistance to the coffee sector though the
coffee recovery program launched in 2005. This is a program administered
by the BMI with a \$ 40.0 million funding level. The program establishes
a maximum of \$335.0 per hectare for farmers interested in recovering
their plantations. This program has a 100 percent GOES guarantee and
also contemplates \$200,000.00 for the establishment of a coffee nursery
where new and improved varieties will be developed. The GOES expects to
have positive results from this program in approximately 4 to 5 years.