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Back to the future for Brazilian soluble: as a EU tariff kicks in on Brazilian soluble coffee, native industry experts plan their next moves to fight back for what is rightfully theirs.

Rio de Janeiro rang in the New Year hours after Brussels, but the first morning cup of normally sweet cafezinho, had an uncharacteristically bitter taste as the 9% EU tariff kicked in on Brazilian soluble coffee. As a large and highly competitive supplier of quality soluble coffee, and the world's largest producer of green coffee, Brazil is used to penalties and persecution in the marketplace. But this did not make the bitter pill of tariff-led discrimination any easier to swallow, even with a cup of 'cafezinho'.

Of the 50 coffee producing countries, only a dozen or so have soluble manufacturing capacity. Soluble coffee exports from origin countries to major consuming nations have always faced hurdles, and Brazil--being the biggest--has always been first in the firing line.

Soluble coffee exports from origin countries is approaching nine million bags per annum (GBE--green bean equivalent), of which 40% is Brazilian. From the 3.5 million bags (GBE) of Brazilian soluble produced every year, only 800,000 bags are consumed in Brazil, leaving 2.7 million bags for export. This presents a huge stock of 'good-as-you-get' soluble exported worldwide at keen prices, which has bothered big multinational manufacturers for a very long time.

Prior to 1965, when Brazil started to manufacture soluble coffee, most was made from Robusta beans. Robusta coffee generally processes into a harsher tasting brew than Arabica. However, the 'run of the mill' Robusta--low in cost--was 'just the job' to satisfy the early learning and undiscerning mass market of that time.

Brazilian soluble was different, processed with access to virtually limitless supplies of Arabica beans, which were unwashed and low in quality, but mildly Arabica all the same. Many retailers switched to Brazilian soluble, and by 1967 it had captured almost 15% of the U.S. market, much to the discomfort of U.S. manufacturers like General Foods, who had traditionally supplied half the home market.

On the basis that its competitive advantage was judged to be unfair, Brazil was forced to impose a tax on its soluble coffee exports to the U.S. Then, in 1971 Brazil was made to supply U.S. soluble manufacturers with half a million bags of green coffee free of export tax, estimated as a transfer of $20 million from the Brazilian treasury to U.S. companies. This was the first taste of a discriminatory 'tax' for Brazilian manufacturers, but more was to come, this time from the other side of the Atlantic Ocean.

Brazilian soluble has always been in good supply and highly competitive in price. Huge increases in Brazilian Robusta production over the past three decades, based on the 'Conilon' variety, have closely followed green coffee demand by the country's soluble manufacturers.

Development and application of modern processing technologies, including flavor recovery and agglomeration, has transformed the use of Brazilian Robusta in soluble manufacture. Robusta resources, in general, were traditionally regarded as utility delivering a harsh, rough-edged brew, but today's technology allows soluble manufacturers to design and deliver some half dozen completely different quality products from the 'same' bag of Robusta beans.

Brazil's coffee conflict with the EU goes back at least 15 years, when Brazilian soluble was saddled with a fluctuating tariff of 9-11%, not levied on other coffee producers, including near neighbors in Latin America.

The preferential treatment given to other coffee producing countries in Latin America and Africa by EU was 'justified' on the basis that farmers were being actively encouraged to grow coffee at the expense of coca, thus limiting the highly lucrative trade in cocaine and other drugs. But Brazil has always regarded this as a poor excuse, claiming those who believed 10% off a bag of coffee beans was enough to stop farmers growing 'drug-yielding' crops, could reasonably be accused of enjoying a drink considerably stronger than coffee.

In 2001, fearing Brazil would refer the whole issue to the World Trade Organization (WTO) and shake the very foundations of their GSP (General System of Preferences), the EU reluctantly agreed to an import quota system for Brazilian soluble coffee. Tariff-exempt volumes for Brazilian soluble were set for a three-year period starting in January 2002 (Table 1).

By the 'Gentleman's Agreement' claim, Brazil affirms that the 2001 discussions included provision for changes in quotas (up or down) at the end of the three-year period, and by implication an automatic long-term extension. In addition, they say, provision was made for planned enlargement of the EU with new member states. Abolition of the quota, according to Brazil, was never discussed, but extension of the quota system for one year after the end of 2004 was written into the agreement.

Exports of Brazilian soluble to the 15 EU member states and East European nations, like Poland and Czech Republic, then outside the EU, increased during the three year period (2002-2004). The system worked well, appeared to be fair, and Brazil regained part of its historic position in the European Market (Table 2).

When 10 East European nations joined the EU in May 2004, during the final year of the quota system, Brazil moved swiftly to increase the quota, confident of the 2001 'Gentleman's Agreement'. But Brazil insists that the 'goal posts' were moved, with EU rejecting any claim for increased quota volume in line with the enlarged membership, because the 2001 agreement was signed outside of WTO. Subsequent suggestions to include soluble coffee in ongoing trade negotiations between the Mercosul Trade Group and the EU were also rejected, thus essentially putting paid to the quota system altogether.

Since the EU GSP is implemented in 10-year cycles, the planning for 2006-2015 was agreed in 2004. Anticipating, it appears, future adverse WTO reaction to perceived discriminatory trading in soluble coffee, the EU GSP included a new class of beneficiary country designated 'Regimes of Good Governance'. The name is supposed to summarize the perceived positive exercise of power by a potential EU trading partner in the running of its economy and utilization of social resources. More specifically, it includes adherence to certain International Treaties with compliance being rewarded with extra preferential trading benefits (GSP Plus) for beneficiary nations.

Mauro Malta, executive director of Associacao Brasileira das Industrias de Card Soluvel (ABICS--Brazil's Soluble Coffee Industry Association) is scathing about the new grouping. "With one or two exceptions, it benefits the same countries, as did the old GSP. It is purely subterfuge and smokescreen to discriminate against Brazil, the world's most important supplier of soluble coffee."

Roel Vaessen, secretary general of the European Coffee Federation (ECF) told Tea & Coffee Trade Journal that ECF had been quite comfortable with the existing quota and abolition was a pity. "Brazil's attainment of 'Developed Country' status means it no longer falls within GSP, and is therefore automatically disallowed from 'Regimes of Good Governance' status," claimed Vaessen. Put simply, it suggests Brazil, as a developed country, is no longer eligible for preferential benefits, and must pay whatever tariffs are paid by other developed countries that produce soluble coffee.

But when, exactly, does a 'developing country' like Brazil become a 'developed country', and who decides? Tony Blair, prime minister of the United Kingdom, has clearly not decided in the case of Brazil. During 'Prime Minister's Questions' on December 14, 2005 in the UK House of Commons, and response to questions about the Hong Kong WTO talks, he referred to Brazil (and India) as 'developing nations' well on the way to becoming 'developed nations'.

Vaessen is not optimistic about early resolution of the problem, pointing out that coffee has now come within the remit of much wider, more difficult and politically sensitive bilateral trade negotiations (MERCOSUL) between Brazil and the EU. These cover a whole range of other agricultural commodities like sugar, beef and soybeans, as well as industrial products, and as such would not be easily resolved. "The question of tariff on Brazilian soluble could no longer be resolved on its own or in isolation from other trade negotiations, and would therefore take a long time," said Vaessen.

Many Brazilian soluble manufacturers speaking to Tea & Coffee Trade Journal consider this as more smokescreen to protect European soluble manufacturers against competition, which accounts for no less than one sixth of the world's soluble production. Brazil sends soluble coffee to all areas of the world and currently exports a full quarter of its soluble production into the EU. Moves to impose unfair burdens on Brazilian soluble are driven by desires to create a captive market for soluble manufacturers in EU member states, claim Brazil's own manufacturers. Mauro Malta, of ABICS, concurs, "Reduction in Brazil's slice of the EU soluble coffee market will create a truly captive market for EU-based manufacturers, currently disadvantaged because they cannot cope with Brazil's superior competitiveness."

In 2001, in support of the quota system, EU said it would help diversify the nature of soluble coffee available within the community. Four years later, they admitted the goal had largely been achieved. "If this is the case," says Edivaldo Barrancos, commercial director of Cafe Iguacu, "with the help of Brazilian coffee growers and soluble manufacturers, why scrap it now?" His view echoes that of many others who say the move discriminates against Brazil, but leaves soluble manufacturers within EU countries as the real potential winners.

One well known and high profile European soluble manufacturer from Germany declined to make any specific comment, but a spokesperson from its Coffee Marketing Department agreed that imposition of the tariff was sad. "We produce a wide range of quality soluble products, but only two out of more than twenty are of Brazilian origin. We are not reliant on Brazilian coffee and the tariff will not affect our ability to service our customers," said the spokesperson, who also admitted that the imposition of an EU tariff on Brazilian soluble would strengthen their production.

"I am not looking for preferential treatment," says Bruno Giestas, commercial manager of Realcafe Soluvel do Brasil, "just fairness and a 'level playing field' on which to conduct business." These sentiments are supported by all Brazilian manufacturers of soluble coffee, who consider misdirected discrimination against Brazilian soluble coffee may be linked to previous and ongoing trade disputes between Brazil and the EU. These may involve completely unrelated commodities like sugar, cotton, chicken and beef, and are bringing misplaced retaliation into play.

"Brazilian soluble manufacturers are already squeezed all round," says Giestas. "Here, in the State of Espirito Santo, farmers produce eight million bags of Robusta every, year, but I could pay 20% less by buying in London and 30% less for Vietnamese Robusta, compared with Brazilian 'Conilon' Robusta just one and a half hours away."

Of course this is all academic, because Brazilian soluble manufacturers do not have the option of trawling world coffee markets for the best deal. While there is no regulation against importation of green coffee into Brazil, bureaucracy is such that it is for all intents and purposes impossible within the commercially required time frame. "This is something we are pushing hard to remedy," says Mauro Malta.

For three years, running the price of Brazilian Robusta was 50% higher than for Vietnamese Robusta, and the low U.S. dollar rate just made things worse. Brazilian Robusta (green coffee) has not been exported for some time and the country's soluble manufacturers are cutting profit margins to the bone just to stay competitive. Fifteen years ago there were a dozen soluble manufacturers in Brazil, now there are just seven. Meanwhile, European soluble manufacturers are making the most out of cheap Vietnamese Robusta, with new plants and companies being established all the time.

"I would like to know who exactly is going to benefit from this unfair and discriminatory tariff," says Luiz Alixandre, of Mogi de Card Soluvel. "Clearly, nobody in Brazil will benefit, and EU importers and packers of Brazilian soluble, re-exported to--for instance--Eastern Europe, will be similarly hurt and made to pass the extra cost on to consumers."

One London-based packer told Tea & Coffee Trade Journal, in December 2005, that in light of the impending EU tariff, he was completely re-assessing imports of Brazilian soluble for 2006. "Even if the tariff was not meant to discriminate, its effect clearly would discriminate between the origins and against Brazil," he said.

"World soluble capacity is 110-120 thousand tons and one sixth of that is Brazilian," claims Bruno Giestas. "European importers of Brazilian spray dried/agglomerated and freeze dried products, that are looking for an alternative supply from other coffee producing nations, will be left 'high and dry'." Figures from ICO confirm this (Table 3).

Luiz Alixandre agrees, "Other substantial players like Colombia and Ecuador don't have the spare capacity to make up the deficit and satisfy demand."

"If you add up the soluble productions of "all European countries the total will still not match that of Brazil," adds Bruno. "Extra costs from the EU tariff on Brazilian products will be transferred to EU consumers," claims Edivaldo Barrancos. Worse still, quality will suffer as margins are squeezed. Brazilian manufacturers assert--don't mind the quality, taste the tariff.

Most European packers are completely against any form of tariff, regardless of the direction it comes from or its target.

London trader, Ian Breminer of Complete Coffee Ltd., does not entirely agree with all these sentiments about future effects on quality and price. "Given the EU's ultra tight limits on OTA (Ochratoxin A) and other contaminants, there is not going to be any fall in the basic inherent quality of coffee used. Anyone even attempting to contravene these limits would be taking one hell of risk."

"As regards to supply," says Breminer, "a number of countries are currently investing heavily in soluble manufacture and any restrictions on the biggest producer will encourage even more investment from other origin suppliers." A well-known European importer from the U.K. criticised the tariff in broad commercial terms, claiming it would prejudice 'private label' products against the 'brands'. Edivaldo Barrancos of Cafe Iguacu agrees, pointing out that private label soluble I accounts for more than 20% of the retail market in some EU countries.

Where do we go from here?

If the impasse is not directly resolved between the two parties, Brazil will almost certainly 'Open a Panel' with WTO. "Lawyers are currently assessing GSP," says Edivaldo, "to determine the strength of our case against the unfair discriminatory EU trade tariff on Brazilian soluble coffee."

"It will cost a lot of money and take at least one year to resolve," says Luiz Alixandre, "but it is necessary to protect the entire coffee industry in Brazil." Malta elaborates, "The increasing presence of Brazilian soluble coffee in world markets is incontestable proof of the quality and competitive strength of our product. Brazil has absolutely no intention of abdicating its right and duty to produce more and better soluble coffee to satisfy its customers worldwide."

As it stands, Brazil could win, because if the tariff is judged to discriminate unfairly, it is contrary to WTO rules. "If this were the case, Brazilian soluble would become free to enter the EU zero-rated and maybe even unrestricted by quota," says Giestas.

Brazilian manufacturers would like the matter resolved outside of the WTO. Under current market conditions, several years of tariff at 9% pending the outcome could cause irreparable damage to the Brazilian coffee industry. This will not do anyone associated with coffee any good, whether they produce the crop, process the beans or drink the beverage. "Those at either end of the supply chain--Brazilian coffee farmers and European consumers--will suffer most," says Edivaldo Barrancos, of Cafe Iguacu.

Clearly, most at risk on the production side are the smaller coffee farmers concentrated in States like Rondonia, Parana and Sao Paulo. This does seem at odds with EU claims and efforts elsewhere to 'look after' small farmers in developing countries with flair trade for all.

Dr Terry Mabbett has been covering the tea, coffee and cocoa industries for decades. He resides in England.
Table 1

Year Total Quota Quota for Brazil

2002 10,000 8,740
2003 12,000 10,488
2004 14,000 12,236

* tons. Source ABICS

Table 2
MEMBER COUNTRIES (1999-2004) *

 1999 2000 2001 Mean 2002 2003 2004 Mean

EU 15 5.9 7.1 8.3 7.1 11.0 11.6 10.6 11.1
NEW 10 1.3 2.0 3.5 2.3 4.0 4.0 3.0 3.6
TOTAL 7.2 9.1 11.8 9.4 15.0 15.6 13.6 14.7

* Thousands of tons of soluble coffe. Source ABICS

Table 3
(1996-2003) *

 1996 1997 1998 1999 2000 2001 2002 2003

Brazil 258 230 262 215 262 246 355 401
Colombia 238 223 239 205 243 193 168 155
Ecuador 181 151 219 174 159 153 193 195
% Brazil 38 38 36 36 40 42 50 54

* Green Bean Equivalent (thousands of 60 kg bags of green coffee).
Source ICO.
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Title Annotation:Soluble Coffee
Author:Mabbett, Terry
Publication:Tea & Coffee Trade Journal
Geographic Code:3BRAZ
Date:Feb 20, 2006
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