Three weeks ago, coffee farmers in Colombia's northern Sierra Nevada mountains set fire to several thousand dollars worth of coffee trees to protest low government-fixed prices paid for their beans.

If they didn't get more money, the farmers threatened, they would replant their fields with marijuana - a substantially more profitable crop.

The farmers are not the only Colombians unhappy with the fruits of what President Alfonso Lopez Michelsen calls Colombia's "coffee bonanza." Despite a current New York wholesale price of around $4.00, more than four times the average 1975 price, coffee exporters say this is the worst year they have had in a long time. Last week, the Colombian Coffee Exporters' association began a price protest of their own, announcing that they will not sell abroad until the government eases the restrictive system of hefty taxes and escrow deposits on coffee exports.

"Coffee is completely screwing up this country," said a foreign economist here.

The problem faced by Colombia, the world's second leading coffee-exporting nation, is that it has too much money. After a decade of slow, steady growth in what many economists consider South America's best-managed economy, Colombia has been hit with a sudden glut of coffee dollars that have mangled development plans and brought the worst inflationary spiral in recent memory.

So great is the dollar glut that Colombia now has the distinction among developing countries of possessing a black market dollar exchange rate that is lower than the official rate.

To control the influx, or at least to take some of the money temporarily out of circulation, Lopez' government has limited the income of the farmers to what is now approximately 30 per cent of their coffee's New York market value. The private Colombian exporters who handle most of the country's coffee business are taxed for most of the rest.

Because a sudden rise in the disposable income of Colombian coffee growers and exporters triggers higher domestic prices for the entire country, the restrictive policy is rationalized as an anti-inflation measure.

But its results have been a disappointment for all concerned. The inflation rate, despite government efforts, is expected to reach at least 30 per cent this year, the highest since 1963 and 12 per cent more than when Lopez took office in 1974.

While the farmers make twice as much on a bag of coffee as they did two years ago, the price of panela, a sugar-based paste that is a dietary staple, has quadrupled. Colombians not in the coffee business are harder hit by the inflationary spiral because their incomes have increased by much smaller increments.

High export taxes also have encouraged coffee smuggling to the point where it rivals drugs as a contraband product. Officials of the National Coffee Growers Federation estimate that of 7.5 million sacks of coffee leaving the country last year, at least 1 million were untaxed contraband.

Most of the smuggled coffee travels the same route to the United States as Colombia's marijuana and cocaine - from Caribbean ports such as Baranquilla and Santa Marta to Panama or the Caribbean islands of Aruba and Curacao. The coffee then is shipped legally to the United States.

Aruba was a major coffee exporter last year, and I don't think they have a single coffee tree," one federation official said.

Smugglers pay farmers far more than the government-fixed price of around $100 for a 137-pound sack of coffee beans. That same sack brings more than $430 on the international market. The difference is almost pure profit - minus transportation costs and bribes to border and port officials.

"The contraband money from drugs, emeralds, and now coffee is being used to corrupt the country," said one Western diplomat, "and it's gradually breaking down institutions. There is no institution that can resist this kind of money."

Contraband profits are brought back into Colombia by local smugglers, turning the flood of inflationary dollars into a deluge.

None of these problems plaguing Colombia would exist were it not for the extraordinary increase in the world price of coffee. Consumers in the United States and Europe have demonstrated their willingness to pay unprecedented amounts for the bean since a combination of natural forces drastically reduced available supplies.

Beginning with the 1975 frost which wiped out 75 per cent of the largest crop - Brazil's - a series of countries: civil way in Angola - the fourth largest producer, earthquakes in Central America, border squabbles between Kenya and Uganda which disrupted shipments, and a drought which cut Colombia's own production by a third. World production is not expected to return to normal levels until 1979. "There is simply no coffee left in the world," said Gilberto Arango Londono, president of the exporters' association.

For nearly a century, Colombia's economy was totally dependent on coffee earnings. Several years ago, however, the country made a conscious decision to diversify its exports. The intent was to avoid the kind of economic catastrophe, caused by wildly fluctuating world prices, that is a constant threat to developing countries dependent on a single commodity.

"Coffee is not like petroleum," said a growers federation spokesman. "It is not a necessity for most people in the world."

The federation, to which every Colombian coffee grower theoretically belongs, launched a program some years ago to discourage farmers from entering the coffee business and to encourage farmers already growing coffee to raise cattle or cotton as well.

By 1975, coffee exports' contribution to foreign earnings was reduced from 77 per cent to 45 per cent. The coffee price spiral which began last year sent the figure back to 55 per cent. The percentage is expected to be still higher this year.

There is a difference of opinion as to who, if anyone, should be blamed for the problems the coffee price spiral has brought to the country.

Gabriel Vega's three acres of land, high in the misty green mountains of central Colombia, constitute a standard-sized coffee farm. It produces about 30 bags of coffee each year, all picked by hand, from which Vega supports a family of eight.

Vega's yearly income from his unprocessed beans is about $1,600. While Vega said he knows nothing about the price of coffee in New York, he knows that he "can't save any money any more" and that his village grocer won't sell him sugar, even at wildly inflated prices, unless he makes a purchase of more than $10 at a time.

Vega said a fair price for his coffee would be about 40 per cent more than he gets now. He blames the fact that the price is low on the coffee exporter, the man who comes up into the mountains and buys his beans.

"Of course they blame us," exporter Arango said. The farmers "have been waiting 100 years for something like this to happen to the price of coffee, and now they can't get the benefits because of a policy the government says is for their own good." The exporter's hands are tied, Arango said.

The way the government keeps the farmers' share down to 30 per cent of the world price is to tax the private exporter almost 70 per cent of what the government determines the price to be. The exporter theoretically makes his profit by gambling that New York will increase the world price faster than the Colombian government gets around to adjusting its tax base. But since heavy profit taking by brokers on the New York and London futures exchanges cut values from a peak of $3.40 a pound to a range between $2.80 and $2.95 in the past month, the Colombian exporters started losing money. The government finally caught up with the price trend.

Colombia's system is different from that of any other coffee - exporting country. In Central America, the market is totally free. The exporter makes almost pure profit once he pays the farmer.

Because the exporters have decided they cannot make a profit after paying the farmer his 30 per cent, any exports from Colombia for the near term will be handled by the coffee producers' federation, which will buy the beans from its members and sell them abroad.

The government turns over to the federation more than half of what it receives in coffee taxes. The federation puts the money in a fund and uses it to promote coffee consumption through advertising campaigns in consumer nations like the U.S. and for projects such as mountain schools for farmers.

A large portion of the federation money goes into a fund used to subsidize payments to the farmer when the world price of coffee drops. So, when the farmer cannot get adequate payment from a private exporter, he sells his coffee to the federation. The idea is that, while the farmers' profits may not reflect enormous world price increases, they will not reflect disasterous decreases either.

Many farmers disagree with that approach. "If the fixed price isn't enough for me to make a living," said Alfredo Gomez, whose 300-acre farm is unusually large for Colombia, "I'll sell to the first 'contrabandista' who comes up this mountain."

Although in theory the federation is a farmers' union, in the eyes of many farmers it has become an arm of the government. Both the federation and the government are conservative about coffee. They live in constant fear that the world price will plummet drastically or that the beverage will become so expensive that people will stop drinking it.

Coffee, President Lopez has warned, could become as dear and seldom-drunk as champagne. To prevent that from happening, the federation is hoping the price will decline to a reasonable, steady level.