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Commodity stabilization fund schemes in PNG.

Commodity stabilization fund schemes in PNG

Commodity marketing in most developing countries is controlled by the state owned para-status or statutory corporations. In some of these corporations the producers have some say in the marketing of their products while others have no say whatsoever.

In PNG, major export tree crops are administered by statutory marketing boards which report to the Government through the Minister for Agriculture but maintain their autonomy through grower-controlled boards. The Papua New Guinea Copra Marketing Board is the oldest board, having been established in 1948. It still continues to market copra today. Later in 1950 it was given the powers to collect and accumulate stabilization funds. The Coffee Marketing Board was set up in June 1964 and had powers to collect and accumulate a stabilization fund. Later the name was changed to the Papua New Guinea Coffee Industry Board (CIB). By example, major export tree crops like cocoa and palm oil have accumulated their own stabilization funds while other rural industries like spices and forest industries will follow suit. The tea industry has no regulating body and therefore has no stabilization fund.

The Coffee and Cocoa Boards operate on the same principle, where, instead of getting involved in the physical marketing like the Copra Board, the marketing functions are delegated to the private sector by licensing them so that the Boards merely regulate and supervise their activities.

The Coffee Stabilization Fund, which was the largest of these funds, operates on the principle that growers forego cuts in their income during period of good prices and have these paid to them during low price periods. It is regulated under a mechanism which triggers a stabilization levy deduction at a rate of 50 toea in every Kina above a predetermined threshold price. The CIB has revised this criteria so that bounty is payable only when average value of coffee is above the threshold price. While the average value is below the threshold causing bounty payments to be paid, no export levy is payable. The new threshold price is expected to be around K2.80 per kg FOB for 1990 which is down from K3.05 last year.

A separate fund as such did not exist for coffee until it was formally established in 1976 coincidently during the Brazilian Frost. Coupled with high interests gained on investments the fund rapidly built up and peaked at K110 million (mln) in 1984/85.

The CIB has paid out up to K900 per ton bounty payments since 1980. In excess of K112 mln has been used in bounty between the 1979/80 and 1989/90 coffee year, and a further K33 min in non-member price subsidy from the fund. The bounty is paid to the growers by the exporters at the declared rate then claim these with documentation from the CIB.

Over 70 percent of the producers are rural farmers. Coffee buyers using trucks, aircrafts and ships canvas the rural areas to carry out a roaring trade by exchanging cash for mostly parchment coffee because of the difficult geographical conditions. PNG smallholder growers accept nothing other than cash for their coffee. Accordingly these buyers provide a unique banking service with their ability to move in excess of K35 mln in one season to the rural areas. Increasing theft and violence associated with moving large amounts of cash is forcing more growers to truck their own coffee to the processing factory located near the urban centers.

The level of the coffee stabilization fund has now dropped to K22 mln and growers are expressing grave concern about their immediate future. The Coffee Board has decided to pay a fixed bounty rate of K350 per ton for the entire season. The industry has requested the Government to top up with a further K10 mln with the objective of raising the bounty to K500 per ton, thus raising the price receivable by growers for green bean to K1450 per ton which is K250 below the average cost of production.

The managed sector which accounts for about 23 percent of the national output will be severely affected. A number of plantations and 20 ha developments have already been abandoned in the highlands and many others are at the point of closing down as the highly paid expatriate employees are forced to leave because their wages could not be affordable. The smallholder's reaction to present low prices will become evident when harvesting swings into full operation in March/April. As is the tradition, smallholders will just ignore picking coffee if they are not happy with the price levels received. Already many other dependent and associate industries like the transport industries, imported food retailers, car dealers, the employment sector and so on who depend on coffee income are facing severe cashflow problems.

The present depression in commodity prices has caused severe drawdown on stabilization fund reserves for copra, cocoa and coffee. The Government has chipped in by allocating K25 mln to cocoa fund and K7 mln for copra fund. The coffee fund stands at K22 mln and further funds are being negotiated with the government.

While the advocates of the stabilization fund scheme hail it as the successful scheme to safeguard the commodity producers from volatile market fluctuations, the critics hold the view that such a scheme delays income which otherwise should have been put to useful purposes by the growers to secure their individual interests. Some economists argue that bounty payments are socially justifiable but tended to create false expectations and a mentality of dependency among farmers which could not be sustainable in the longer term. Growers should get the prevailing market prices and plan their own insurance schemes rather than depend on a board of trustees who, in some instances, did not share the growers concerns and aspirations. Consequently the Coffee Board does not guarantee the full flow on the bounty through the marketing chain and the smallholder growers often complained bitterly about being cheated by the middlemen. Similarly the fund is open to abuse and manipulation by political elements.

However, the schemes have proven their objective by demonstrating the fund's ability to prolong growers' income and survival under present low price circumstances. The PNG coffee industry is at the crossroad now to assess past implications and decide whether it is worthwhile to continue with the scheme or resort to other alternative income insurance measures. These hard decisions will have to be taken when the current funds run out by September 1990 and the industry debates its future survival schemes.
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Title Annotation:Papua New Guinea Coffee Industry Board
Author:Mitio, R.M.
Publication:Tea & Coffee Trade Journal
Date:Mar 1, 1990
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