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The goose that once laid golden eggs....

The goose that once laid golden eggs...

Some, within the U.S. coffee trade, may have been extremely short-sighted when they greeted enthusiastically the collapse of the ICA last year in July. Putting aside for a moment the very good reasons which made the quota system inoperative, and concentrating on the industry's motives for backing a free market, one finds arguments of three kinds, doctrinal, conjunctural and structural:

Philosophically, America is the land of Laissez Faire, of the law of Supply and Demand, of Survival of the Fittest. Any curb to free trade is regarded with suspicion and condemned if not proven essential. This, by the way, makes America's deep-rooted protectionism appear illogical, but logics do not stand a chance in front of national interest.

Conjuncturally, there was, up to July 1989, a short term incentive to buy coffee cheaply to non-member destinations, store it in free ports, and unload it in traditional markets after the lifting of quotas. However profitable it may have been since millions of bags were involved, the operation constituted an unrepeatable one-time shot. Its effects have rippled until now, clogging the pipeline and depressing prices, but will leave nothing but memories once the stocks have dried up.

Structurally, the idea was to free access to pure Milds and to go back to the basic law of Supply and Demand for the various growths. Admittedly, this aim has been reached, but there never was a physical shortage of Milds and their higher price had no adverse effect on the Trade.

Sixteen months after the big change, American trading houses look neither happier nor healthier than two years ago, far from it: With a few smart or lucky exceptions, this branch now generates smaller profits, employs fewer people and involves less companies. Bankruptcies, divestments, mergers and acquisitions have taken their toll and the free market has a lot to do with it: Individually, the failure of such or such Brazilian or Mexican exporter creates (in the best case) dramatic losses for some importers. Such examples are countless. More generally, one does not need an MBA to realize that profit margins are not the same in a 80 [cents] and in a $1.30 market, while over overheads do not fluctuate with the C contract. In addition, the narrowing of the range between the cheapest and the most expensive coffees has reduced the opportunity and the profitability of special deals which used to provide windfalls to numerous houses. One may argue that the Berlin loophole would have disappeared anyways, but the first slamming of its door came when the ICA collapsed.

What good some trading houses realistically could expect from a free market was never too clear to us, but we came up with two possible answers. First, they may have picked the wrong fight: Final consumers and the roasting industry both had an interest in seeing prices decline, each being confident that lower prices implied savings for consumers and bigger profit for the roasters. But what was in it for traders . . . ?? Secondly, all traders may have expected to see their company among the few stronger and richer ones when the dust settled.

What we now see is very similar to airline deregulation, but in a much shorter time span. A result contrary to the original goal, with very few groups gradually dominating the scene. This, in our opinion, is already happening, which may explain the market's recent apathy and rangeboundness. An open interest made of Funds (which follow moves but don't initiate them) and of fewer, bigger coffee groups would create a market inert in principle but easily steerable, with big leverage. A powerful weapon . . .!
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Title Annotation:collapse of the International Coffee Agreement
Author:LeBlache, Pierre E.
Publication:Tea & Coffee Trade Journal
Date:Dec 1, 1990
Previous Article:Grinding technology.
Next Article:Freshness: a quality essential.

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