21 A number of key factors limit the benefits of mill competition for farmers. First, the use of modern mills with minimum volume requirements implies that some regions of the country may only be able to support a limited number of mills (natural monopsony). These regions, if outside the Central Valley, may also be geographically segregated markets due to poor transportation infrastructure, thereby further limiting the competition for coffee cherries that might otherwise take place if mills (or farmers) were to travel. Second, competing for coffee cherry output requires a high liquidity, since payments in advance of the harvest must be made to producers in order to secure volumes. Historically, this has been a problem for cooperatives, whose social activities limit their available capital. The liquidity issue was exacerbated for mills more generally with an end to special arrangements with the banks for financing the coffee sector in the 1980s. The liquidity constraint on the advance payment system clearly has implications for competition: More liquid firms can secure volume, not by bidding up the price, but by advancing higher portions of the final price. On the one hand, this may amount to a desirable provision of credit for farmers. On the other hand, interview evidence and independent studies of the Costa Rican coffee market (Garro 2000; Hazell 2000) concur that large advances are taken by farmers to imply higher final prices. This expectation of higher prices based on higher advances, however, does not always materialize.

In addition to the technological and financial factors that may potentially limit competition in the market for coffee cherries, the geography and infrastructure of the country also play a role. Some 44% of the national coffee growing area is in the hands of smallholder farmers: 92% of producers have coffee farms under five hectares in size whilst the two percent that have farms of more than 20 hectares account for 35% of the coffee growing area (ICO 1997). These large farms are almost all located in and around the Central Valley (Ardon 1980), leaving the more remote regions of the country’s coffee growing to smallholders. This is potentially problematic due to the limited access to transportation available to these regions. In 1995, only 17% of roads in Costa Rica were paved and the national number of cars per 1000 households (urban and rural) was 114.<sup>21</sup> On the other hand, it should be noted that coffee grown in the Central Valley does benefit from the infrastructure centered on the nation’s capital, which is located there; almost 50% of the nation’s coffee is grown in the Central Valley, including the high altitude Los Santos regions (see Figure 4).

_Producer prices in Costa Rica_ In addition to regulating the roles of different actors in the coffee market, Icafé also undertakes the annual calculation of farm-gate prices. Farm-gate prices refer to the price that each mill must pay farmers for every unit of coffee cherry purchased. As mentioned, the pricing policy of Icafé, as stipulated in Law 2762 came about in response to concern over potential market power abuse by mills.<sup>22</sup> While recognizing that Costa Rican processors/exporters are perfectly competitive in the output market (that is, they are price takers in the international coffee market), the fear was that input prices for cherries were being paid below their value marginal product at a monopsonistic price. Icafé therefore regulates the marketing margin of processed green coffee to ensure an input price for farmers exactly equal to their value of

> 21 World Bank Development Indicators (WDI Online), 2006.

> 22 Jimenez, A. University of Costa Rica, personal communication.