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Brazil faces turbulent times ahead.

Can Brazil's coffee industry overcome serious challenges and prosper in the international market?

In the 1950s and 1960s, coffee represented 50% of Brazil's total exports. That figure now stands at less than 5%. As Brazil developed, one of its primary products lost its relative position in the country's export quotas. What happened?

In 1989, two international events took place that sent shock waves around the globe and had tremendous repercussions. The fall of the Berlin Wall was splattered across headlines the world over. It signaled the end of a terrific era: capitalism had triumphed over communism and a new world order was established. Less broadcast but just as compelling was the expiration of the economic clause of the International Coffee Agreement (ICA).

For many years, this clause had established export and import quotas for countries, which regulated coffee prices and ensured against an oversupply of coffee in the international market. Over the years, more countries entered the coffee business, drawn to the industry's tidy profits. As more players joined the action, the system of quotas chopped up the market into increasingly smaller slices. Brazil saw its share in this market fall from 40% in 1960 to 20%.

Finally, in 1989, citing its ever-decreasing share in the market, Brazil refused to sign the new Agreement. According to Rodolfo Takahashi, vice president of the soluble manufacturing Iguacu, with the end of the ICA, the international market collapsed, coffee prices fell dramatically, and competition became predatory. Other [TABULAR DATA FOR TABLE OMITTED] coffee producing nations, such as Colombia, took advantage of the situation to increase their own share of the market.

Meanwhile, Brazil faces what some fear to be insurmountable odds. Structural and institutional costs within Brazil, import tarrifs in Europe, and declining exports to the U.S. indicate that Brazil is losing competitiveness in the international market.

The soluble coffee industry, which accounts for 15% of Brazil's total coffee exports, has been hit hard. In 1997, export figures for soluble decreased from the previous year for the fourth consecutive year (see chart). Brazil's exports to the U.S. have fallen 42% since 1996 and, while exports to Japan did increased 5.6%, overall Brazil is steadily losing market share. In 1996, Brazil exported 2.5 million 60 kg. bags of soluble (green equivalent); in 1997, these exports fell 6.7% to 2.3 million bags.

Discriminatory Tariffs in Europe

In November of 1990, the E.C. implemented a 9% tariff solely on Brazilian goods. This import tax was lifted from other so-called "drug countries" - such as Colombia, Ecuador, Venezuela, Central America, and Africa - in order to boost their economies and combat drug trafficking.

Originally, the tariff was implemented on a temporary basis; however, it has since become permanent, and poses a serious threat to Brazil's competitiveness in the European market. As the tariff is calculated as a percentage of the value of the goods, the soluble market - especially the value added freeze dried product - is suffering more than the green. By 1993, Brazil's soluble exports to Europe had fallen 53%, while Colombia's coffee increased 33% over the same period.

The Brazilian government and coffee industry question the criteria that were used in establishing the tariffs and are working together to try to overcome them. In January of this year, a Brazilian delegation met informally with the authorities of the E.U. in Brussels for the first time to evaluate their respective positions on this issue. At this meeting, the officers of the E.U. rejected Brazil's claims that the system of tariffs impedes Brazil's entry into the E.C. This response was a huge disappointment to the Brazilian delegation, which was headed by Ambassador Graca Lima and included ABICS president, Sergio Coimbra; vice president, Dr. Roberto Cesar Ferreira Paulo; and executive director, Mauro Malta.

Brazil is now in the process of arranging a formal meeting between the Brazilian government and the E.U. Should another impasse occur, Brazil will appeal to the World Commerce Organization (WCO), which will then set up a panel to analyze the situation.

In the eventuality of a WCO intervention, both the E.U. and Brazil would be obliged to abide by the organization's ruling.

The U.S.

Until 1990, the U.S. was the largest buyer of Brazilian soluble coffee, accounting for approximately 40% of the country's soluble exports. Since then, Brazil has been losing market share in the U.S. In 1996, Brazil exported 521,000 bags of soluble to the U.S., but this figure fell to 301,000 bags the following year, representing a decrease of 42%.

Previously, U.S. companies bought Brazilian soluble coffee in bulk, packaged the product, and distributed it under their own brand. With the opening of new markets and the availability of cheaper raw material from Asia, companies such as Folgers and General Foods have restructured their operations. They now import green coffee from Vietnam, Indonesia, and other countries, and process it into soluble coffee within the U.S.

The Emerging Markets

With tariffs in Europe and exports to the U.S. falling, Brazil has been forced to look for new markets in Russia and Asia. These emerging markets, primarily tea drinking nations, may hold the key to unlocking Brazil's future.

Soluble coffee has been pivotal in opening new markets. Studies by the ICO have shown that, due to the similarity in the preparation of soluble coffee and tea, introducing soluble coffee into tea drinking nations does not require drastic changes in the population's drinking habits. "Once soluble coffee has become established and there are more brands available, the market develops and consumption shifts from soluble to other forms of preparation, such as percolated, filtered, and roast and ground. From there, the industry takes off," explains Malta. This strategy worked well in Japan. In 1951, Japan imported 1,600 tons of soluble coffee. By 1965, Japan's imports had grown to 29,000 tons. In 1979, Japan consumed 200,000 tons of coffee and the country is today the fifth largest consumer of soluble coffee in the world. It took 15 years for coffee to really take off in Japan, but Brazil hopes it will happen much quicker in China and Russia. Says Malta, "We hope that after five years of consumption of soluble, the consumer will move onto other forms of preparation."

Brazil aims to gradually develop the industry along these lines in Russia and China, with the intention of doubling their consumption over the next 5-10 years.

In recent years, Russia has become Brazil's greatest market for soluble coffee, but Brazil is losing ground even in this promising market. In 1996, Brazil exported 897,000 bags to Russia. In 1997, exports fell 17% to 746,000 bags. The problem has been that European companies are now competing in a market that Brazil pioneered. Similar to the U.S., these companies are buying green coffee cheaply from other sources, processing it into soluble form, and selling it in Russia.

Soluble manufacturers in Brazil hope that China will become a major market in the next 10 years. For the moment, however, demand for coffee in China continues to be repressed and China's 67% tax on imports discourages other countries from exporting coffee there. Malta believes that China's entry into the WCO will be crucial because the country will be obliged to lower its tariffs in accordance with WCO regulations. With one billion potential consumers, this could become an important market.

Other Sources of Competition

Vietnam has gone from a small to a high volume producer of Robusta. Where once it produced fewer than 500,000 bags, it is now producing six million bags of coffee a year. Vietnam's cheap labor force has enabled it to supply the international market with Robusta coffee at a far lower price than Brazil.

In addition, following the economic crisis in Asia, Asian countries have devaluated their currencies and are flooding the global marketplace with cheap products. While this raw material is available to U.S. and European companies, Brazilian soluble manufacturers cannot use this coffee. Government legislation restricts them from importing coffee from Africa and Asia for fear of importing new pests that would affect Brazil's own coffee plants. Consequently, Brazilian soluble manufacturers pay more for their raw material than their European and U.S. counterparts.

Brazil's greatest competition comes from U.S. and European companies - which just happen to be their clients as well. These companies, which used to depend on Brazilian coffee, are now buying the green, processing it into soluble, and re-exporting it to the same markets that Brazil is exploring.

Internal Problems

In addition to upheavals in the international market, Brazil has faced numerous problems on the domestic front.

The governmental organ that had regulated Brazil's coffee operations for over 60 years, the Instituto Brasileiro do Cafe (IBC), was dissolved in 1990, thus leaving Brazil's coffee industry in limbo. The IBC had controlled all aspects of the coffee market, such as regulating prices, carrying out intensive research, and providing growers with technical assistance. Suddenly, there was a vacuum.

Coffee prices fell dramatically after the demise of the IBC and the ICA - from $150 per 60 kg. bag of green to $50. The growers were the hardest hit. Those who did not have the financial resources to continue abandoned the coffee industry. The growers that were able to produce at a low price have been rewarded by the subsequent jump in price to $200-$250 per bag. These farmers are now investing in renovating their farms, making their plantations more dense (thereby increasing production by growing trees closer to each other).

Since July of 1994, when a new economic plan was implemented, the Brazilian economy has been experiencing structural reforms. The overvaluation of the real in comparison to the U.S. dollar has meant that the coffee sector's costs in Brazil are higher than they are elsewhere. This "custo Brasil" encompasses the greater difficulties involved in transporting coffee due to poorly maintained roads, various taxes on production, high interest rates, and the draining of ports, highways, and railways.

Brazil has only recently tried to recover coffee's political importance with the creation of the Conselho Deliberativo da Politica do Cafe (CDPC) in October of 1996. The president of the council is the Minister of Industry and Commerce, and the Treasury Department, Secretary of State, and Department of Agriculture are also represented, as are the growers, exporters, and roasters.

In addition to carrying out market and field research, approving harvest plans, predicting the harvest figures, and regulating the policies for stocks, the CDPC will administrate Funcafe, a fund established during the IBC's tenure. The CDPC will release the funds throughout the year to address the needs of the growers and the private sector.

Quality Issues

Brazil has traditionally been a volume-oriented producer with little concern for quality. In the 1970s and even more in the 1980s, when the demise of the IBC left the coffee industry to its own devices, Brazil woke up to the necessity of paying attention to quality. "Today, we will only produce the huge harvests if Brazil has where to sell the coffee," says Malta.

Brazilians will argue that quality is a subjective term. And they have a point. Brazil is unusual in that it uses a third method of processing coffee, in addition to the dry and washed methods. With "semi-washed" coffees, the beans are dried once the pulp and mucilage have been mechanically removed. The full-body and low acidity that characterizes these coffees is not prized among Americans, who prefer the high-grown Central American milds, but it is finding increasing popularity in Europe.

Chief among the admirers of Brazilian coffee is the highly respected Italian coffee roaster, illycaffe, which uses 50% Brazilian (and only 10% Colombian coffee) for its espresso. Every year, illycaffe holds a competition in Brazil for the best coffee. The company judges 500-600 samples that are submitted by growers and selects about 400 of these. From these samples, Illy will buy the bags that they need, even offering to pay a higher price for them than the market value. Durval Fernandes, coordinator of the Department of Agriculture and Supply (Procafe) for the state of Sao Paulo, explains illycaffe's preference for Brazilian coffee: "Brazil has been able to incorporate good physical properties with excellent chemical properties that give an excellent full-bodied taste. It has a good per cup yield, and has good flavor and aroma."

In the past, the Brazilian growers were not remunerated for producing high quality. Consequently, they had no interest in investing the added effort and expenditure to produce high quality coffees. This scenario is slowly changing as growers are becoming aware that if they produce higher quality, they will be able to sell their coffee quicker and obtain a better price.

This year, for the first time, the Coffee, Sugar, and Cocoa Exchange is considering the addition of washed Brazilian coffee to the Coffee "C" Contract. Should this take effect, this new market will encourage Brazilian growers to produce high quality coffee.

Marketing, or Lack Thereof

While the Colombian Coffee Federation has implemented a strong promotional campaign for Colombian coffee over the last 30-40 years, Brazil has been conspicuous in its absence. There has been no effective marketing for "Cafe do Brasil."

During its tenure, the IBC did carry out a promotional campaign, which was not successful for several reasons. First, it never married the interests of the institutional sector with those of exporters, suppliers, etc. Second, the IBC would advertise in countries where Brazil had a regular presence, like Germany and the U.S. Third, there was never any continuity with the promotions.

Now, for the first time since the IBC, the CDPC is developing a program for marketing Brazilian coffee internationally. Not only will the needs of the private sector be addressed, but the private sector will actually decide on how the financial resources will be used, in the form of calculated budgets with specific goals. Funds will come from Funcafe and from contributions from the private sector.

Brazil is launching its marketing campaign during the World Cup in France this year. The highlight of this campaign will be a stand at the Louvre, where t-shirts, caps, buttons, and other promotional material will be sold. There will also be billboards posted around the soccer field and the country.

While Brazil aims to maintain its presence in the traditional markets of Europe and the U.S., advertising in these countries has its problems. These markets demand a large amount of resources, for a low level of response. In addition, coffee consumption is declining in these countries, and coffee companies are having to compete against other beverages, such as beer and soft drinks, for market share.

Meanwhile, in potential markets such as Russia and China, coffee carries positive connotations: It is perceived as a new product, closely linked to Western habits. Brazil hopes to capitalize on this image with a small marketing campaign for soluble coffee, the first of its kind, in China and in Russia. Says Malta, "Our perspective is that the markets that are available to us are not the traditional markets. We do, of course, have to maintain them because we do not want to lose our position in Europe and the U.S. but our vision is concentrated on new markets because they are our great hope. They will be the key point, responsible for opening the coffee market of the world."

Much will depend on future meetings between Brazil and Europe. The E.U. cannot simply shut the door to Brazilian products because it, too, has interests in Brazil (among them, a desire to export vehicles to Brazil). On the other hand, changes within Brazil will also need to take place. Brazilian government has been very aware of the need to shift its emphasis from politics to commerce and economics.

As the new millennium approaches, various important developments are taking place. Among them are projected meetings to adjust the International Commerce Organization by the year 2000. These meetings will discuss agribusiness, industrial goods, and the service and information technology industries. Brazil has great interest in the developments in the area of agribusiness and industrial goods. In addition, it has been predicted that in the year 2000, the imposition of tariffs on products will cease. Should this happen, countries will no longer be able to use external tariffs to protect their interests.

The Brazilian soluble industry is worried about its current difficulties but remains hopeful about what the future holds. This year's harvest, estimated at 31.2 million bags, may provide some relief for their problems.
COPYRIGHT 1998 Lockwood Trade Journal Co., Inc.
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Article Details
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Title Annotation:Brazil's coffee industry
Author:Melenikiotis, Veronica
Publication:Tea & Coffee Trade Journal
Article Type:Industry Overview
Date:May 1, 1998
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