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As quotas end, a new 2-tier quality market?

As quotas end, a new 2-tier quality market?

Only two years after deciding to give quotas another chance, the world coffee industry has abruptly decided to jettison the system once again. This time, though, they might have taken the first step towards dismantling the whole structure which has laid down the guidelines for supplies and prices for the past 25 years. Richard Clark examines the possible consequences.

There were, for once, none of the usual well-polished limousines double-parked outside the International Coffee Organization's London offices on July 3. The industry's star performers had given the event a miss, leaving it to the familiar repertory company of permanent trade officials from the embassies to act out the final drama.

It was a muted performance, about as exciting as a meeting of the PTA called to discuss the state of the school's drains, and the final vote which junked quotas and left the Agreement in tatters was passed almost casually, after a day in which the prevailing emotion seemed to be one of irritable impatience.

Once it was done, however, people began to consider the consequences, and the immediate collapse in prices gave the clearest possible indication of unsettled times to come. Yet it has to be said that members were surprised by the outcome, rather than astonished. It has been clear for some time now that support for the commodity pact ideal has been waning in most industrial countries, so that consumer interests were prepared to concede very little in the run-up to the September deliberations which normally decide the major political and economic issues.

Ever since quotas were reintroduced in September 1987 after the last free market, consumers have been complaining bitterly about the Agreement clauses which not only limited supplies of the origins that roasters wanted, but also contrived matters so that member countries were paying more for their coffee than non-members. The suspicions that some of those cut-price, non-quota beans were ending up as bargain offers to the trade and industry inside the virtuous circle didn't win many friends either.

Perhaps producers underestimated the force of consumer bitterness about the two-tier market. Ther have been protests in the past, coupled with a series of implied threats, but in the end there has always been some sort of compromise deal worked out quietly, away from the public gaze. So, how come everyone miscalculated so badly this time around?

Before taking things too much for granted, the producers might have done better to study first the example of the Cocoa Agreement, now passing quietly away--and in the very year when the United Nations Conference on Trade and Development (UNCTAD) finally launched its long-awaited Common Fund. As it is, this year's September/October meetings will probably be more concerned with trying to decide what can be salvaged from the ICO itself than with attempting to find new and less bendable regulations for the world trade in coffee.

Over the years, since it was formed as an arm of the United Nations in 1963, the ICO has considerably increased the scope of its activities. Apart from its supervisory and statistical functions it maintains a comprehensive library of reference material at the Berners Street headquarters, compiles and checks a mountain of statistics on exports and imports, oversees the allocation of Promotion Fund cash to subsidize campaigns in the U.S. and Europe--all in addition to its continuing function as a central secretariat.

Among members of the trade and industry there is currently some doubt as to whether the ICO will survive as more than a stump of its present self when the new coffee year begins in October. At the end of September there will be meetings to wind up one or two administrative matters after which - depending very much on which countries sign up for membership - it might be time for a new council to start work on an extension of the last agreement, or even to begin formulating a new and perhaps more equitable Agreement.

In the meantime, trade and industry alike are having to come to terms with a whole new set of commercial realities: not all of them comfortable. One view in London was that the U.S. in effect torpedoed hopes of a compromise because "they don't like to think that somebody else is getting a better deal than they are," so that they were especially infuriated by the spectacle of outsiders getting more favorable treatment. Be that as it may, everyone in the business is looking despairingly at newly overvalued inventories, reserve stocks, and warehouse full of beans that roasters want to buy at the new prices.

In the wings, consumer groups in the U.S. and throughout Europe have been swift to demand instant reductions in retail prices and although companies like Nestle UK are insisting that it takes at least 12 weeks for lower green coffee prices to filter through to the shops, the odds are that if one major coffee company's nerve cracks all the others will be compelled to cut their profits and absorb the loss.

In addition, the shortage of the top quality coffees will become even more acute, and the best origins will go to whichever roaster offers the best deal. In effect, this could create a whole new two-tier market, but this time there will be one level for the preferred Arabicas and high-grade Robustas, another for run-of-the-mill beans.

It will be the supply-and-demand market in its purest form, and for many coffee enterprises the need to work in a wholly unregulated environment is likely to prove an unnerving experience.

Politically, too, there will be a heavy price to pay. The Honorable Timothy Lewin, chief executive of London trade finance and counter-trade specialists Financial Research Associates points out that the EC's Stabex fund, which was created to help stabilize the earnings of members of the Lome Agreement will now need to make up the difference, and "it's going to cost an awful lot of money" to meet obligations to those former colonies.

Lewin agrees, too, that producers couldn't bring themselves to believe that consumers had finally grown weary of the endless wheeling and dealing. "What's more, they couldn't really agree on a common approach," he says. "The Centrals in particular wanted more, and they wouldn't accept that there weren't enough slices left in the coffee cake."

As far as the industry is concerned, he points out that "the main consideration isn't simply what you have to pay for your supplies, it's what your competitor is paying for his."

It remains to be seen, therefore, whether or not the old "special deals" of unsanctified memory, whereby the bigger roasters made direct sweetheart arrangements with producers, will return to play havoc again with the mechanisms of the trade. Those were the circumstances which helped to drive many medium-sized roasters either into the arms of their rivals or simply out of business in the late 70's, early 80's; together with the revolution in dealing technology via satellite and computer, they also transformed the coffee trade, obliterating names that had been famous in the big trading centers for decades.

It was probably this, more than any other single factor, which misled some of the producers into thinking that, in spite of all the huffing and puffing, the consumers were not really prepared to accept the political consequences of precipitating a free-for-all. After all, it has been more or less the same every year for over a quarter of a century. It usually began with a grimly inflexible statement of intent from Brazil, a rather more circumspect approach by Colombia, nervous interventions from all the other producers, and a chorus of rather forced disbelief from the consumers.

Essentially, though, it was still very much a family affair, a basically friendly round of good-tempered bargaining, flowery debates that went on late into the night, culminated in those exhausting last-minute sessions where the clock was stopped and September 30th could last for anything up to three days. But the family has split up since then.

Europe is preoccupied with the run-up to the unitary market in 1992, and the U.S. has a new Administration which seems to be distancing itself from the easy-come, easy-go philosophies of the Reagan years. However, there is no escaping the fact that many producer countries have vast economic problems, and if they cannot earn foreign currency through their exports then the creditor nations will have to bail them out with direct aid, so whichever way they choose to approach the problem it's going to cost money anyway.

In summary, then, the general consensus is that the ICO's most powerful members have no apparently decided that they can do without the constraints which membership imposed, and this could mean the end of one of the world's most successful producer/consumer agencies and the dismantling of its role in maintaining a stable market. The signs are, too, that the promotional and educational functions would also be wound up, leaving only a much reduced secretariat to handle basic statistical information and maintain the industry's links with governments.

But with no one at the wheel, it's hard to see just how long one of the world's great commercial cultures will stay on the road.

Without friends around you, it's a cold, cold world out there.
COPYRIGHT 1989 Lockwood Trade Journal Co., Inc.
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Title Annotation:International Coffee Agreement extended without quotas
Publication:Tea & Coffee Trade Journal
Date:Aug 1, 1989
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