Financial Times (London) April 4, 2000, Tuesday London Edition 2

COMMODITIES & AGRICULTURE: Coffee is the key to the reconstruction of East Timor: Crop is only source of foreign exchange, but there are problems, writes Shawn Donnan:

By SHAWN DONNAN

Ever since aid groups and multinational organisations including the United Nations and the World Bank entered East Timor last year, the nation's coffee industry has been seen as key to rebuilding the devastated territory.

The crop is the country's only source of foreign exchange, but there are serious problems overshadowing a successful harvest.

The infrastructure remains largely shattered from the three-week rampage led by the Indonesian military and pro-Jakarta militias last September. There is little or no electricity outside Dili, the capital; the road system has been badly damaged by the heavy armoured vehicles from the Australian-led security force and United Nations peacekeepers. And all of the wet processing facilities used for high-grade Arabica coffee were put out of operation during the violence.

Wet processing produces a better quality coffee, and commands a higher price. According to World Bank economists, wet-processed Arabica beans from East Timor will fetch up to 20 US cents a pound above the crucial New York "C" contract price. Dry-processed beans trade for up to 30 US cents below the contract price. The May "C" contract was trading around USDollars 1.02 a pound on the New York Board of Trade yesterday.

Sam Filiaci, director of the US government-backed National Co-operative Business Association, the largest coffee buyer in East Timor, says its wet processing facilities will be up and running in time for this year's crop.

But the plants owned by the co-operative, which sells a quarter of its exports to the US chain Starbucks each year, can only handle about 40 per cent of the Arabica crop. Arabica accounts for about 80 per cent of the 8,000-ton harvest expected.

This means farmers will be forced to dry process Arabica beans and therefore accept much lower prices for their crop.

Much of the 10,000-ton 1999 crop survived the September violence and was dry processed after the destruction of the wet processing facilities. The co-operative has been buying these beans, which are often dried along roads in the Timorese highlands, for about 6,000 rupiahs (78 US cents) a kilo, as part of its aid mission. "It's pretty lousy stuff," says Mr Filiaci.

But the lack of processing plants is not the only problem. The situation is being made worse by politics. The leadership of East Timor's leading political group, the National Council for Timorese Resistance (CNRT) keeps issuing conflicting and sometimes inflammatory statements.

"It's tough to get a unified message from the CNRT," one industry expert says. "Their concern is that the farmers get the highest possible price. But their experience in managing the market is very little and their first impulse is to try to regulate it."

CNRT leaders this year launched an attack on the US-backed co-operative, accusing it of being a monopoly and maintaining close ties to Indonesia.

The CNRT is also looking for other buyers and a Portuguese coffee magnate, the Delta group's Rui Nabeiro, has already visited the territory at its invitation.

The World Bank is also keen to find other international buyers. "We would love to have more coffee traders here," a World Bank economist says.

But the World Bank is concerned about a 5 per cent export tariff on coffee beans imposed by the UN transitional administration with the backing of the International Monetary Fund.

The IMF argues the levy is a "presumptive income tax" that Timorese growers can afford. But the World Bank sees it as an added obstacle in the process of rebuilding East Timor's rural economy.

In the long term, the World Bank wants to encourage the diversification of East Timor's rural sector into horticultural products and cottage industries such as furniture production. But in the short term, coffee, as East Timor's only source of foreign exchange, is the key to reconstruction.

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