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Mar 14, 2012 | 14:22 GMT

8 mins read

Criminal Commodities Series: Cocaine

Stratfor

The world's most substantial quantities of coca, the plant from which the illicit drug cocaine is derived, grow in South America, and local manufacturers process almost all of the cocaine there. Coca can be grown in a number of geographic locales, including Mexico, but only the South American geography is ideally suited to naturally cultivate the plant in large enough quantities for mass production. In fact, Peru, Bolivia and Colombia collectively account for all of the cocaine production in the world.

Whoever controls the territory where coca is grown and produced controls the worldwide supply of cocaine, but no single South American criminal organization controls all of these territories. The result is an oligopolistic supply network that excludes Mexican drug cartels. Unable to supply coca on its own, Mexico will continue to serve as a conduit through which cocaine is trafficked, relegating the country's drug cartels to being distributors but not suppliers.

Cultivation

The 2011 U.N. World Drug Report indicated that between 14.3 million and 20.5 million people used cocaine in 2010. Cocaine use has decreased in the United States but has increased in other places, such as Asia and Africa. Worldwide, cocaine generates around $70 billion per year.

But what many refer to as cocaine technically is called cocaine hydrochloride (HCL). "Cocaine" is one of 14 naturally occurring alkaloids in the coca plant, of which there are more than 200 species in the Western Hemisphere, according to the U.S. Drug Enforcement Administration. These plants grow year-round in various locations. But of the 200-plus species of coca, only two contain levels of the cocaine alkaloid sufficient for cocaine HCL production. One of these species typically grows on the eastern slopes of the Andes Mountains in Bolivia and Peru. Generally considered the superior species in terms of alkaloid content, this plant grows in humid climates at altitudes between 500 and 1,500 meters (1,600-4,900 feet) above sea level. While coca is harvested between three and six times per year on average, the coca from the eastern Andes reportedly can be harvested as many as eight times per year.

The other species suitable for refining cocaine HCL grows in warmer climates and at lower altitudes, such as those in Colombia. Indeed, much of the coca grown in Colombia is done so in the country's lowland jungles. The coca grown there contains less of the cocaine alkaloid than its mountain counterpart, and what it does contain is of poorer quality. Accordingly, less cocaine HCL is rendered from coca harvested in the Colombian jungles, though eradication efforts by Colombian authorities may also contribute to this. (Eradication destroys mature plants, which forces growers to harvest younger plants with less cocaine alkaloid.)

According to the 2011 U.N. World Drug Report, three countries — Colombia, Peru and Bolivia — harvested all known coca in the world, and virtually all of the harvested coca is refined and processed locally. Colombia harvested some 81,000 hectares (200,000 acres) of coca in 2008, yielding roughly 450 metric tons of pure cocaine HCL. (Pure cocaine HCL refers to what distributors buy from suppliers before it is cut with such agents as cornstarch, talcum powder or baby milk powder.) Peru harvested around 56,100 hectares of coca that same year with around 450 metric tons of pure cocaine HCL produced, while Bolivia harvested about 30,500 hectares of coca to produce 113 metric tons of pure cocaine HCL.

Notably, the 2011 U.N. World Drug Report did not have finalized, aggregated figures of cocaine produced by these three countries in 2010. The figures it did provide ranged between 786 metric tons and 1,054 metric tons, which is consistent with amounts produced from 2005 to 2007 (1,020 metric tons to 1,026 metric tons).

Colombia remains the most prolific manufacturer in the world. Since most of the Colombian cocaine is destined for the United States, it is unsurprising that there are many production sites there. But with an increasing demand in such markets as Asia, Africa and Europe, more refinement centers are needed in countries that are part of the transport route to these burgeoning markets. This may explain why refinement centers reportedly are increasing in Brazil and Venezuela (on the route to Europe) and Peru and Bolivia (on the route to Asia).

Geography and the Supply Chain

Turning coca into cocaine HCL is a relatively simple three-step process. Once the leaves of the coca plant are harvested, they are rendered into what is known as coca paste. From there, the coca paste is processed into cocaine base, which eventually becomes cocaine HCL. The process involves several precursor chemicals: kerosene, sulfuric acid, sodium carbonate, hydrochloric acid, potassium permanganate and acetone. Most of the chemicals used in the process are commonly found, readily available and easily replaced or substituted, making them difficult for authorities to regulate.

But it is not the chemistry of refining coca that helps South American criminal groups maintain their pre-eminence in the supply chain; it is the South American geography. Indeed, the same geographic features that endow South America with unrivaled access to the coca supply help shield coca producers from government interdiction — and thus retain their control over supply.

The Andes Mountains divide Peru and Bolivia, separating the majority of their respective populations from the remote regions where coca grows. This barrier insulates grow areas and refinement facilities from government authorities. The Peruvian and Bolivian governments often cannot effectively build transportation infrastructure in regions with low population levels — doing so is very expensive — making the projection of force into coca-growing regions difficult. In Colombia, geographic separation likewise benefits coca farmers, who are located primarily in the southern part of the country. Establishing security in the Colombian jungle and highlands for extended periods of time is extremely difficult, as evidenced by the continued existence of insurgent groups, such as the Revolutionary Armed Forces of Colombia.

Being able to operate with minimal government interference has enabled criminal groups in some countries, particularly Colombia, to streamline the refinement process. In remote areas, coca crops, refinement facilities and transportation infrastructure, including airstrips and roads, are all located close to one another.

Local populations typically are subsistence farmers, and coca leaves sell at a higher price than most other commodities. In addition, many coca-producing regions are populated by indigenous peoples, who have deep, long-standing cultural relationships with the coca plant. This does not necessarily mean that they support the production of illicit drugs, but it does provide some political cover for growing the coca plant. After all, coca can still be grown legally in Peru and Bolivia as long as it is intended for traditional use.

For these reasons, coca farmers can grow their crops with relatively little pressure from their governments. Even massive amounts of resources dedicated to plant eradication efforts thus far have proved inadequate in preventing coca cultivation and refinement. Just as the South American geography begets large-scale coca cultivation, the geography also protects growers and refiners from government counternarcotic operations. Thus, there is relatively little disruption to the supply chain.

Competition and Demand

Given all these geographic factors, it is extremely doubtful that Mexican cartels could ever produce the quantity of coca produced by their counterparts in South America. The combination of available land, altitude and humidity unique to South America's coca-producing countries cannot be replicated in Mexico. For Mexico's criminal organizations, buying the finished product at the source is cheaper than developing the agricultural capacity to cultivate the coca plant on an industrial level.

Consider the cost of cocaine. A kilogram of pure cocaine costs around $2,000 in Colombia (it is even cheaper in Peru) but nets about $10,000 in Mexico and around $25,000 in a major U.S. city. And according to the 2011 New South Wales Crime Commission Report, a kilogram of cocaine can sell for as much as $191,000 in Australia. These prices do not even include the profit derived from the sale of cocaine after distributors have cut the drug and sold it to users on the street. The price users pay for the drug depends on several factors, such as the street value in the destination city, but in any case, the markup is substantial.

Because the supply of coca — and thus cocaine — has not been monopolized by one South American group, a true cartelization of the product has yet to take effect, creating competition among suppliers for access to distributors. This competition in turn has led to an elastic demand; the wholesale price of cocaine varies at different locations in the supply chain. Instead of trying to take over the supply of cocaine, Mexican distributors focus their efforts on buying the refined product as cheaply as possible and as close to the source as possible, while securing the destination markets where they can maximize their profits.

For example, a kilogram of cocaine bought in Colombia can yield as much as $23,000 profit when sold in the United States. But a kilogram of cocaine can cost a distributor as much as five times the Colombian cost if it is bought in Guatemala, resulting in a loss of profit. Given the money at stake, it is little wonder that competitive prices have emerged. Increased production in Peru and Bolivia gives cocaine traffickers in Mexico more options for buying the product at the source, which in turn increases competition among suppliers.

The financial benefit to trafficking cocaine is clear. Mexican drug cartels and other distributors are turning major profits from a seemingly endless supply of coca, so there is little incentive for distributors to spend money to finance their own supply. Because of this, distributors will remain reliant on their South American suppliers.

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