By Peter Blackburn

PATROCINIO, Brazil, Nov 7 (Reuters) - In the high savannah of Minas Gerais, coffee pioneers aim to boost quality so they can fetch higher premiums and stay afloat in a world market flooded with mediocre beans.

Minas Gerais state grows more coffee than Colombia, which is the world's second largest producer after Brazil. The savannah -- known as the Cerrado -- is home to some of Brazil's finest beans.

Traditional and state-of-the-art coffee producers in the Cerrado are developing new coffee hybrids, as well as production and processing methods, to meet consumer demands for high quality beans.

At the Alto Cafezal estate, Jose Carlos Grossi said, however, "We're losing money at current price levels." The grandson of Italian immigrants, Grossi was one of the first to plant coffee 30 years ago in this part of the so-called Triangulo Mineiro.

He said he came to Patrocinio, 3,280 feet (1,000 meters) above sea level, because the area was frost-free, the land was cheap, and the government gave cash bonuses.

"I arrived from Sao Paulo state with a diploma and $12,000. No one believed that coffee could grow here," said Grossi, who now owns 10 farms covering 4,400 hectares (9,885 acres), including 1,450 ha (2,470 acres) of coffee.

But Grossi struggled as world prices slumped during the past four years to record lows. While aiming for premiums of 6 to 8 cents a lb over CSCE arabica futures for his fine coffees, he has had to sell at similar-sized discounts.

CSCE's December contract was fetching 60.20 cents a lb Friday.

Last year, Grossi ripped out 22 percent of his coffee trees to plant soy and corn, but he still believes there's a future for specialty coffee.

"We will continue investing in quality," he said, adding he would replace old trees with higher-quality varieties developed on his experimental farm.

Grossi has invested in sophisticated irrigation equipment to raise yields and quality. Irrigation helps in the uniform flowering and harvesting of only ripe coffee cherries.

Visiting roasters from the United States, Japan and Norway swatted clouds of early evening insects as they clung onto the back of a pick-up truck speeding along a bumpy track to view a center-pivot irrigation system.

The electrically driven metallic pivot, fed with water from a nearby river, slowly rotates on rubber wheels round a huge 112-hectare (277-acre) circle, showering coffee trees.

"It uses 20 percent more water than other (drip and sprinkler) systems, but it gives better yields," said Grossi.

Up to 50 60-kg bags of coffee are produced per hectare -- or 2-1/2 times the national average - and a single circle can supply a small country such as East Timor for a year.

STATE-OF-THE-ART

At the state-of-the-art Daterra estate, owner Luis Norberto Pascoal says he spares no expense on equipment to produce the highest quality espresso coffee by so-called sustainable methods.

But for the past five years, the estate has been losing money and been bankrolled by the family-owned holding company, one of Brazil's leading tire distributors.

"From this year we should get higher prices as we are now producing certified espresso quality beans," said an enthusiastic Pascoal, believing that an 18-year dream was coming true.

Daterra was awarded the coveted ISO 1401 standard in 2000 for environmental management and the Rainforest Alliance Certificate for protection of the native forest. A number of coffee drinkers in the United States and Europe go out of their way to find so-called "green coffees" which are grown with as little damage to the environment as possible.

"But certificates don't deliver quality," Pascoal said, noting strict needs of major buyers, such as Italian roaster Illycaffe.

Daterra has bred new yellow cherry varieties which are sweeter and ideal for espressos.

"Yellow cherries have a lower yield than red ones but are 50 percent sweeter and ideal for espressos," said Pascoal.

Daterra has rejuvenated its coffee plantation with Bourbon and other top varieties since buying Boa Vista farm in 1994.

"One year we planted 4 million trees in 40 days," Financial and Commercial Director Osvaldo Pizano said, adding that planting is concentrated in December when the weather is at its wettest.

Daterra grows 10 varieties of arabicas from more than 80 different plantation sites on its farmland covering 7,000 hectares (17,300 acres) of which 3,000 ha is forest.

It has invented new cleaning and sorting systems, including an ultraviolet electronic sorter to remove invisible white beans that give a poor taste.

In its espresso laboratory, Daterra developed software to achieve the best roasting levels, brewing and blending.

American experts admired the caramel crema beverage.

"It has a chocolate flavor, almond fragrance and leaves a delicious marzipan aftertaste," said Colleen Crosby of Santa Cruz Coffee Roasting.

Andrew Barnett from Ecco Caffe in California agreed. "It's elegant, and very aromatic."