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 
 
----------------------------- 
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. 
 
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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. 
 
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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