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American altruism in action.

The green coffee market has risen by around 60% since late summer. This was happening even while the International Coffee Organization was carrying on a series of meetings, wringing their collective hands about how they could recartelize the world coffee trade to achieve higher prices. Note that such things can be done by governments with impunity, while a businessman indulging in price fixing would go straight to jail. Thus, governments are exempt from the field of morality, abandoning it to the unwashed masses of ordinary citizens.

In fact, blame for the chaos of the past few years can be laid strictly at the doorstep of the various governments involved. Apparently the people in charge are incapable of holding in their minds the concept that the free market can provide the only rational answer to world coffee prices, supply and demand. And because they know the issue seems too complex for the average home maker to grasp, governments in consuming countries can blithely ignore the fact that prices under an ICO agreement are much higher than the free market would provide.

Of course, if you nail a politician with the question, "Why do you sacrifice your own citizens through the signing of an agreement that you know will raise their cost of living?," you will get a warm and fuzzy, altruistic answer to the effect that sacrificing for the poor of the third world is the moral thing to do. And after all, they are cunning enough to know that it is easier for the president to transfer American wealth to foreign nations through higher coffee prices paid by the hapless consumer than to go before Congress to raise money for foreign aid.

Apart from the questionable ethics of sacrifice involved, it happens that such arguments, even on utilitarian grounds (the most good for the most people), are false, for it can be shown empirically that not just consumers, but coffee growers, most of whom are indeed in the third world, suffer as well.

When I entered the coffee business on April Fool's Day, 1950 (nothing symbolic there, I hope), Brazil grew 60% of the world's coffee, and America imported 60%, so the two countries actually controlled the market. Because of Brazil's dominance, prices were fairly volatile in response to such things as frequent frosts, so that the free market of the time did experience ebb and flow in costs. Thus you will hear politicians evoking the word "stability" when rationalizing their true motives for driving prices to higher, but "more stable" levels. To be charitable, they are either evading or are incapable of grasping the consequences of their action. Let us look at some of these consequences:

1. It is quite natural for coffee growing countries, as with individual people, to want to grow and become more prosperous. And like individuals, they don't want to give up what they already have. Brazil resists lowering its quota, along with other countries whose share of world production is shrinking, as with the 13 IACO African countries. Under a system of international controls, politics rules, making it tough for countries whose production is growing to get a larger share.

2. Coffee growers, like farmers everywhere, need to farm profitably. If a price is too low, they will turn to alternative crops. When a price is pegged artificially high, however, farmers are duped into perceiving a demand that does not really exist. This adds to the surplus, with calamitous long-range consequences, such as the collapse of the market when controls are removed.

Artificially high coffee prices cause farmers in certain countries to be discouraged from growing alternate crops to meet a real demand. And farmers in countries where coffee is the dominant export--such as Uganda, Ethiopia and Burundi, where it accounts for over 80% of total earnings--are forced to compete with farmers in lands where alternate crops could be grown more profitably.

A good case in point is Brazil. Below a certain price level it might not make sense to cultivate coffee at all. In 1976, 60.5% of Brazil's exports were raw products and agricultural commodities. By 1981, just five years later, the figure had dropped to 38.3%. In fact, in 1988, coffee accounted for only 7.5% of Brazil's foreign earnings, and this trend continues today.

To encourage Brazil to maintain an ICO quota of close to 30% of world supply--over 40% of the supply of Arabica, is to ensure the very instability that the ICO is supposed to be correcting.

3. Given surplus world inventories, was it surprising that consuming countries behind the old Iron Curtain could buy coffee at a fraction of the prices that Western nations, sacrificial signatories to the old ICO agreement, were paying? This was obviously an immoral circumstance that was allowed to continue in spite of the lip-service given by ICO members.

4. Higher prices encouraged governments in various growing countries to levy confiscatory taxes against their own people. Thus we saw the ridiculous example, after a Brazilian frost, of a large portion of the Colombian crop going on barges in the night to Aruba in the Netherlands Antilles, to be trans-shipped as semi-roasted coffee to the rest of the world. And some growers received less than 10% of the selling price of their country's coffee, the rest being skinned by the government. This was most severe in communist African states.

5. World trade in coffee resembled the drug trade in some respects. Every export bag was to be recorded, but what if coffee did not come from the origin indicated? The "basket quota[ America allowed to non-signatory countries such as Red China, because we were at the time trying to be especially nice to them for some reason, had the ludicrous effect of our importing more Arabica coffee from China than it grew. No problem-- China could simply re-bag coffee it had imported from some other country whose quota had been filled, pay for it with textiles, and ship it to the U.S. This scenario had U.S. customs agents, used to chasing cocaine smugglers, sniffing around for illicit coffee, of all things.

6. For farmers and exporters, political pull to obtain export quotas became an important fact of life. How else was one to navigate the system and get rid of one's coffee in a time of surplus, tightly regulated by government controls? Hatred, envy, and other social ills were the predictable result.

7. We hear it said that, after the breakup of the coffee Agreement, prices fell below the intrinsic cost of growing it. But what is the cost of growing it--what country are we talking about? It may be that for the farmer in one of the emerging nations the cost is well below that in an economically advanced one.

8. Observe what happened whenever a Brazilian frost or drought occurred, and it was perceived that world supplies may be insufficient to meet long-range demand. It became "deuces wild," and the consumer got it in the neck through runaway prices. Thus, the producers got protection from us when there was a surplus, but when there was a threat of a shortage they said, in effect, "International agreement, what International agreement?"

9. Artificially high prices slow demand, adding to the world surplus and invoking further hardship on growers.

We who love the coffee business should fight to increase public demand for our product. The ICO can help in this effort without governments becoming involved. The volume thus created would help ensure that countries growing coffee around the world would enjoy ever-increasing sales, and at satisfactory prices.

Let us not, however, ask the American people to sacrifice themselves by consenting to a price-rigging exercise that is, in any event, futile in the long run. To paraphrase philosopher Ayn Rand, "In the practice of altruism, the benefactor always becomes the victim."
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Title Annotation:International Coffee Organization and price fixing
Author:Daw, Stuart
Publication:Tea & Coffee Trade Journal
Date:Jan 1, 1993
Previous Article:Managing specialty coffee risk.
Next Article:Coffee and the kidneys.

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