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Colombia now has high hopes for free market.

Colombia now has high hopes for free market

The mood has changed in Bogota following the February-March Milds price recovery. Now the feeling is growing that Colombia may not only be able to survive but may even prosper long-term on a free world market, unfettered by the quota restrictions of the former International Coffee Agreement.

Yet only a few months ago, many Colombian crystal-gazers were forecasting the worst. In the wake of the ICA's demise in July, Milds tags had tumbled to as low as 71 cents to the pound, and the country, it was thought, might lose as much as $500 million this year in coffee export earnings because of the price slump.

Now, though, with prices once again above the dollar-a-pound level, even the pessimists are having second thoughts. Market prospects, it seems, are not quite as bleak as had been feared, ICA or no ICA.

Bogota's free traders - the brokers who for years argued that Colombia lost more than it gained from the ICA - are today understandably jubilant. In their view, they have been revindicated by this year's market recovery. All along, they have affirmed that the choice quality of Andean Milds would enable Colombia to hold its own and more on an open market and, as a corollary, they shed no tears when the ICA collapsed last year.

But then came the price depression which cut Colombia's coffee export revenue by $105 million last year, despite the increased volume of shipments. And worse could follow, warned the Growers' Federation, a staunch supporter of the ICA which it would like to see speedily resuscitated.

So, for a few months at least, the free traders were forced onto the defensive. Seemingly events had proved them wrong. The Colombian coffee industry, far from thriving on an uncontrolled market, was in fact wobbling precariously, with prices so low that planters evidently had reason to fear for their future.

Subsequently, however, in the first quarter of this year, the pendulum swung yet again. In the face of real and feared supply shortages, Milds prices picked up, and today it is not the Bogota free traders but their pro-ICA opponents who are on the defensive. Only time of course will tell who is right.

Will the present price up-surge persist, as the free-traders predict? Or is it merely a transient phenomenon, prompted by speculation and fortuitous events such as adverse climatic conditions in Mexico and harvest shortfalls in Brazil?

Questions such as these are of key importance to the Colombian authorities who now have to decide whether to increase the domestic prices paid to coffee planters and, if so, by what margin. The stakes are high. The Growers' Federation could incur heavy losses if it augmented domestic tags substantially and if world prices then declined.

Accordingly, the Federation has adopted a wait-and-see stand. Before taking a decision on the price issue, it wants to assure itself that current market trends will hold.

Planters and free traders have attacked the Federation for its caution. They argue there is little or no possibility of an early return to the quota system. Hence, with the ICA likely to remain a dead letter, they say Colombia must today do everything it can to augment coffee output in order to take full advantage of the free world market.

But planters, they caution, will have little incentive to increase output unless they are paid significantly higher prices for their crop. At current prices, many planters barely cover costs; others, who make a profit, register no more than modest gains in most cases.

Given this background, Colombia may be hard put to rapidly boost Milds output, which even today is running at below projections - and so much so that in the not too distant future the country may be unable to meet overseas demand. The solution, then, say planters, is to hike domestic prices to a remunerative level that will stimulate growers to modernize plantations and so expand production.

Little Risk

Free traders assert that, if the Federation proceeds along these price lines, it will be risking little financially because, in their opinion, the current scarcity of choice Milds will continue to characterize the world market. Prices of top-grade coffee will therefore not only stay firm, they conjecture; they can be expected to improve further.

Political uncertainties in Central America will continue to dog production there, runs the argument, while in Colombia itself, supplies will remain tight for the foreseeable future. In short, if some Bogota traders are to be credited, the market outlook is now so bullish that Colombia may once again soon be earning $1.5 billion or more annually from coffee shipments, as it did in the ICA era, if it can scrape together sufficient supplies to export.

Consequently, if this sanguine hypothesis is accepted, Colombia long-term may be better off without the ICA because it should be able to maintain its traditional coffee-export income but without having to bear the costs of stockpiling the millions of bags which it used to have to retain in warehouses under the quota system.

One free trader who is looking forward with confidence is the prominent coffee exporter, Gustave Gaviria. He maintains that Colombia should be able to sell all the choice Milds is can export if only because the country's average yearly output is now no more than 12 million bags. After allowing for domestic sales, contraband and other factors, only 10 million bags will be available each year for export, estimates Gaviria, but annual foreign demand for the country's Milds is expected to be 14.4 million bags.

A supply deficit of this magnitude, of over four million bags a year, should keep prices buoyant, agree other exporters. They, however, differ as to when such a deficit will first be experienced in earnest. Some predict it will be two or three years before Colombian supply shortages provoke problems. Others suspect difficulties could arise earlier. But Colombia may soon have scant export-grade stockpiles to draw on to make up for supply deficits.

The Federation, for its part, has tended to downplay suggestions that production will fall short of demand. Current harvest declines are attributable to temporary factors such as replanting, say officials. But output will rise, they predict, when replanted or pruned acreage comes into production.

In any event, whatever the future, Colombia meanwhile continues to ship out more than a million bags of coffee a month via its antiquated and hard-pressed ports, which have nevertheless somehow held up to the strain. Between July 1989, and February of this year, Milds consignments increased nearly 25 percent.

The pressure on the ports will grow even further if Colombia succeeds in its ambitious plans to open up new Milds markets in countries such as mainland China and the newly liberalized eastern European nations. Additionally the government hopes to develop a wide range of other exports, and this will put yet more strain on the creaking harbor administration.

But against this, the World Bank is expected to finance a far-reaching port modernization program, and the country should thus be able to keep abreast of its shipping problems. Already there has been a start to the modernization process.
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Title Annotation:coffee trade
Author:Nares, Peter
Publication:Tea & Coffee Trade Journal
Date:Apr 1, 1990
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