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Coffee producer cartel explained.

From 1962 until 1989 the coffee industry was governed by a number of International Coffee Agreements, which were operated successively. The substance of these Agreements were a quota/price mechanism whereby the flow of coffee was controlled by quotas assigned to each of the member producing countries. The price mechanism made more coffee available when upward trigger points were penetrated, and had coffee taken away from the quotas when the lower trigger points were reached. There were periods during the existence of the Agreement when economic provisions were suspended due to stressful situations such as major frost in Brazil, droughts, and/or other crop catastrophes. These intervals usually lasted anywhere from one to two years and then the quota price system resumed.

However, the Agreement failed because of three basic flaws. First was the inability for coffee consumers to obtain regular supplies of the coffees which they needed for their blends. Secondly, was the lack of proper controls to enforce all of the provisions of the Agreement and an unwillingness to issue penalties for violators of the Agreement regulations. Third and finally, there was obviously subversion by both producers and consumers of various provisions of the Agreement, which resulted in the quota mechanism not being fully adhered to and excess coffee being shipped through so-called back doors.

During negotiations in the first half of 1989, an impasse came about between producers and consumers which resulted in suspension of all economic provisions and a return to a free market in July of 1989. For the first time in 27 years the real forces of supply and demand came into play and it became quickly apparent that there was simply too much coffee in the world and prices collapsed to near all time lows.

Obviously, this turned out to be a difficult period for the producers who lost considerable revenue due to failing prices. In some instances, planters were unwilling to take proper care of their plantations. The long term outlook was for poorer quality coffee and possibly smaller crops due to attrition and abandonment of coffee plantations because the farming of coffee was no longer remunerative.

A number of meetings were held from 1989 to 1993 trying to revive the Coffee Agreement by creating a new better Agreement, but in the end the differences between the consumer and producer positions could not be bridged and the Coffee Agreement was simply extended without economic provisions to the end of September 1994.

However in the meantime, it appears that for all practical purposes there is no willingness to even look at a new Agreement and the International Coffee Organization has made major cuts in their personnel and will be operating with a much smaller staff starting October 1, 1993. There has even been a bill introduced in the U.S. Senate to stop funding the ICO by the U.S., particularly in view of producer activities which will be discussed further in this article.

With the price situation being severe for the producers, they began discussions to see how they could advance coffee prices through unilateral action including as many producer groups as possible. During the spring and early summer of 1993, they reached an Agreement among the Latin American producing countries to withhold 20% of the 1993-1994 crops subject to certain price levels to be achieved.

The Inter-African Coffee Organization, spearheading the African coffee producers, had their own agenda to withhold a total of 15% for the same crop years. During a meeting that was held in August 1993 in Kampala, Uganda, the Latin American's and African's agreed that 20% withholding overall would be better. Therefore, it is now the intention of this producer cartel to begin to withhold 20% of their crops starting October 1, 1993 with certain trigger prices at which the withholding would shrink to 10% and reaching a higher trigger price, the withholding would be zero.

The Brazilians have temporarily decided that an exporter upon registration for sale of 1,000 bags must deliver an additional 200 bags to the Brazilian government authority which will then apparently reimburse the exporter for the withheld coffee.

The Brazilian exporters will, perhaps, have little taste for this type of situation, as many of them still remember an operation called "Patricia" which took place in the late 1980's whereby the Brazilian government requested exporters to purchase, on its behalf, a large quantity of Robusta coffee to influence world coffee prices at that time. This coffee was purchased and stored in Europe and seven years later, exporters still have not been repaid for financing these particular purchases. Therefore, the Brazilians will face the obstacle of persuading their coffee industry to go along with the withholding scheme.

Other countries will have other types of problems in raising the money through various schemes. Each country will have to do its own financing.

Each country needs to set up proper controls to make sure that the system is adhered to at all times and that the coffees are collected, stored, and monitored to be certain that all of the countries are adhering to the agreed to scheme. The countries must be vigilant in order to prevent cheating in this type of operation. There are many ways to subvert a system of this type.

The chances for success of the producer cartel have to be measured by the solidarity which the producers will experience during the pact. They have been talking about an International Control Agency and if they could indeed employ an agency of this type to carefully watch adherence to the pact, then they certainly could be successful, at least in the short term. There are also other difficulties in the world market which may prevent the scheme from being successful.

First and foremost is the fact that stocks in consuming countries are still extremely high and probably double of what is normally experienced. There are roughly 20 million bags of coffee in stock in Europe and the U.S., versus a normal stock of around 10 million. It had been felt that beginning in the Spring of 1993 some of this stock might be drawn down, but so far the experience has shown the stocks have held up pretty well being replaced by new imports as the stock is being used up for roasting purposes. The U.S. Department of Agriculture's annual crop forecast also indicates no shortages of coffee anywhere and an ample supply for world consumption.

Therefore, while the idea of moving coffee prices upward through withholding scheme certainly can not be criticized in the light of the low prices which the producers have experienced, in the long run a free market would do better for both consumers and producers. It would favor those that have the right qualities and control their production and those who do a good job of marketing their coffee in world commerce.

During the history of coffee in the 20th century, there have been some previous attempts by producer groups, not as all encompassing as this one, to influence coffee prices by certain withholding schemes which generally failed. It remains to be seen how well the new cartel operation will work. There are certainly a number of challenges which the producers must face and have not as yet solved.
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Title Annotation:Coffee Break
Author:Heuman, John
Publication:Tea & Coffee Trade Journal
Article Type:Column
Date:Oct 1, 1993
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