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Colombian government breaks 11% price increase promise.

The coffee price depression is starting to hit Colombian planters in earnest. They had hoped for an 11% increase in the domestic Milds price in October, if only because that was what the government had promised them earlier in the year.

But to the dismay of growers, they received a price hike of only 6% because, according to the authorities, there is no money available for a larger increase. Predictably planters reacted irascible, accusing the government of failing to keep its word.

Mario Gomez, a member of the National Growers' Committee, huffed that planters have received cavalier treatment. He warned that if growers' earnings continue to drop in real terms, then coffee production will also decline. "People stop planting," he cautioned, "when business is bad. What is in danger today is the livelihood of 350,000 coffee-growing families."

Defensively the authorities have responded that they have had to restrict the hike in the domestic price because any greater increase would have imperilled the financial position of the National Coffee Fund--the price stabilization fund of the industry.

As it is, even with the latest price hike of only 6%, the fund is likely to have a major deficit by the close of the year. The fund's cash level is running low as a result of inter alia, poor world prices and a drop in Colombian Milds exports because of market saturation. To a lesser extent, the decline in exports can also be traced to new Colombian currency regulations that temporarily complicated foreign commercial transactions.

The current tension between the government and planters has arisen because Colombian Finance Minister Rudolf Hommes pledged earlier this year to reduce annual inflation from last year's figures of 32% to 22%. Austerity would be the order of the day, he announced, and he urged industrialists generally to peg price and wage hikes to a maximum of 22% in the year, in line with his anti-inflationary program.

Reluctantly coffee planters agreed to accept these limitations, despite the fact that in recent years hikes in the domestic price for Milds have failed to keep abreast with the ever-rising cost of living. Also, to minimize inflationary pressures, growers agreed to accept their annual 1991 price increase of 22% in two separate installments. The first 11% hike was introduced in March, while the second 11% increase was due in the fall.

Hence planters' anger. Instead of receiving the second 11% hike, they were accorded a smaller increase. As a consequence, the domestic price has only risen some 17% overall this year. Aggravating the situation, inflation in 1991 will probably be 27% or more (versus the government target of 22%), so in real terms planter's earnings are expected to drop at least 10%.

Short-term, this will not affect the supply of Colombian Milds. But in time, unless the domestic price improves in real terms, both production and quality are likely to diminish. Many growers, faced with constantly mounting costs and falling returns, may be forced to cut back output, replanting, pruning and disease and pest control fumigation. Some will drop out of the pack altogether.

The Growers' Federation, however, remains guardedly sanguine. It predicts that world prices should recover if a new international coffee pact can be concerted. Planters remain skeptical. They suspect that the Federation may be trying to gloss over the impasse at the recent London summit of the International Coffee Organization, which failed to endorse the Colombo-Brazilian proposal for a voluntary supply retention scheme.

The Colombians were hopeful that exporters and consumers would agree to producers holding back 10% or so of their coffee exports in order to reduce over-supply and thus firm prices. But as many Colombian exporters had predicted, the none too realistic initiative came to nothing.

Against this, though, the Brazilians agreed in London to consider the possibility of a new ICA pact--an idea which they had previously opposed. The Growers' Federation can claim much of the credit for persuading the Brazilians to change their mind on the issue, following the rejection of the voluntary retention proposal.

After the London summit, the Federation, reporting on the meeting, presented it in all but victorious terms. True, it conceded, the South Americans' retention proposals had been torpedoed. But no matter. More important, it affirmed, in the wake of London conference, the Brazilians and the world as a whole were once again thinking in terms of reviving the ICA quota accord.

To which, some Bogota Milds exporters report they will believe it when they see it--their same, earlier reaction to the voluntary retention idea. They point out that it may be months before detailed negotiations on a new pact get under way. In the interim, they warn, there is no guarantee that the unpredictable Brazilians may not once again change course and reverse their currently pro-pact stand.

And even if pact negotiations resume in earnest, what are the chances of their succeeding? The disagreements over quotas and quality that triggered the collapse of the last pact are likely to resurface in any future talks, fear those Colombians who do not share the Federation's optimism. Their betting, then, is that coffee prices will not recover significantly for the foreseeable future.

Meanwhile, Colombian planters, though hardly thriving today, can at least console themselves with the though that, for all their problems, they are still among the world's best paid coffee producers. On average, they were earning in mid-1991 some US 70 [cents] per pound compared to only 56 [cents] in Brazil, according to a study by the Colombian coffee exporters' association.

Another study, by the Growers' Federation, analysis the decline in Colombian Milds exports in the coffee year, ended last September. In that period, shipments dropped by roughly 1.5 million bags to 12.2 million.

Exports to ICO nations declined by only 3%. By contrast, exports to non-ICO countries plummeted by 68% to only 571,000 bags. One reason for this was that some nations in the former Soviet bloc reduced purchases of choice coffee in favor of lower quality suppliers because of their economic problems.

Sales, however, to Colombian's two principal clients, and Germany, increased, if only by moderate margins. In the current coffee year, total Milds exports of some 12.8 million bags.

One country in which Colombia hopes to expand sales is Argentina, whose coffee imports, until 1960, stemmed primarily from Brazil. But by 1990, Colombia's share of the Argentine market had grown to 30%, compared to only 5% some 17 years earlier.

Four new all-Colombian brands have recently been launched in Argentina, though it may take time for them to win wide acceptance.

The problem is that the Argentineans have traditionally drunk coffee roasted with sugar and other sweeteners, and the beverage there thus bears scant resemblance to Andean Milds. The Colombians, though, are optimistic that the "gauchos" will adapt their drinking tastes to more classy products.

Finally, on the political front, hopes are rising that an end may finally be in sight to the 27-year Colombian guerrilla war. Peace talks between government representatives and delegates of Colombia's 8,000 or so communistled rebels have opened in the Venezuelan capital, Caracas, and, it seems, a cease-fire may be agreed in the not too distant future.

Subsequently, following a truce, it is hoped that the insurgents will lay down their arms and return to civilian life. Such a development would be welcomed by coffee growers. Though planters have to date suffered relatively little at the hands of the rebels, they have nevertheless long feared that the guerrillas may sooner or later infiltrate plantation zones and disrupt production.
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Title Annotation:Colombian coffee growers angry over only a 6% price hike in domestic coffee
Author:Nares, Peter
Publication:Tea & Coffee Trade Journal
Date:Jan 1, 1992
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