Coffee

Coffee prices were relatively stable during the first five months of 1989 because of concern over drought damage to the 1989 Brazilian crop, heavy rainfall in Colombia, a late coffee harvest in Central America, and quota reductions for exporters of robusta coffee. When a third ICO negotiating session in early June failed to extend the 1983 International Coffee Agreement, and yielded no new agreement to succeed it, coffee prices weakened that month. With the suspension of export quotas, effective July 4, 1989, prices dropped 29 percent in July.

In the six months following the suspension of quotas, intense competition among a number of the major coffee exporting countries, including Brazil, Colombia, Kenya, Indonesia, and Mexico, led to sharply higher exports and plunging prices. Exports of ICO members to all destinations in the second half of 1989 were 19 percent higher than during the first, whereas in 1988 exports in the second half had been 4 percent lower than during the first half. The ICO’s composite indicator price—an average of the U.S. dollar prices of mild arabica and robusta coffees—which averaged 116 cents a pound during the first half of 1989 fell to 71 cents in the third quarter and to 62 cents in the fourth quarter. Export unit values fell from an estimated 111 cents a pound in the first half of 1989 to 68 cents in the second half.

Reports of dry weather in Brazil, cold weather in Mexico, and a downward revision in the estimate for Colombia’s 1989/90 crop contributed to a recovery in the prices for mild arabica coffee to 85 cents per pound in the first quarter of 1990. The recovery, however, did not extend to robusta coffee, whose price fell to 53 cents, the lowest level since the second quarter of 1975.

When ICO quotas have been in effect, the supply/demand balance for the different types of coffee, and hence the price differentials among them, have been directly affected by the quotas allotted to each type of coffee. When quotas were in effect between 1981 and 1986, arabica coffee averaged about 20 cents a pound higher than robusta coffee. In the period between March 1986 and September 1987, when quotas were suspended, the differential between the two coffees narrowed to 10 cents a pound. The differential rose to 35 cents a pound in the 1987/88 (October-September) coffee year, when quotas were once again reinstated. A sharp increase in the supply of mild arabica coffee, following the suspension of quotas in July 1989, caused the differential to narrow to 18 cents in the third quarter of 1989. This differential, however, widened to 28 cents in the first quarter of 1990 because, unlike mild arabica prices, robusta prices showed no signs of recovery. The reason for the widening price gap appears to be related to a strong market preference for mild arabica coffee, which is now relatively inexpensive, rather than to a surfeit of robusta coffee, since in any case the percentage increase in exports of robusta was lower than that of arabica coffee during the second half of 1989.

Owing to the short-run price inelasticity of demand for coffee, the impact of the fall in coffee prices on coffee consumption has been limited. Moreover, the fall in green coffee prices has not been fully reflected in lower retail coffee prices partly because roasters have been improving the quality of their blends by increasing the proportion of higher quality arabica. Nevertheless, world coffee consumption, as measured by “disappearance” in importing ICO member countries and net imports of non-ICO members, is estimated to have increased from 69.1 million bags (60 kilogram bags) in 1987/88 to 70.6 million bags in 1988/89. The ICO’s annual survey of coffee drinking in the United States indicated that per capita coffee consumption increased by 5 percent in 1989, while the number of coffee drinkers increased by 2.5 percent. Coffee consumption in Western Europe in 1989, however, is estimated to be only slightly higher than in 1988.

Despite the sharp fall in coffee prices and a reduction in producer prices in a number of countries, the outlook is for world coffee production in 1989/90 to rise about 2 million bags to a level of 94 million bags. Although this is an “on” year in Brazil’s biennial coffee production cycle, production in that country has been sharply reduced by drought and other factors. Brazilian production is an estimated 26 million bags, which is only slightly higher than last year’s harvest and substantially below Brazilian production “potential” of about 40 million bags in an “on” year. Colombian production is estimated to increase about 2 million bags from its 1988/89 level. Following the pattern established during the second half of 1989, world coffee exports are expected to rise sharply in 1989/90, and stocks in exporting countries are expected to fall by about 8 million bags. The fall in global stocks, however, is expected to be much smaller, because much of the fall in producer stocks is likely to be offset by an increase in stocks in consuming countries.

The two major issues that led to the suspension of export quotas in July 1989 were the importing countries’ desire to have a larger part of the global quota allocated to quality arabica coffee, and the sale of quality coffee at discount prices to buyers in countries that were not members of the Agreement. These issues remain unresolved. Though bilateral and multilateral discussions to draft proposals for a new international coffee agreement have been reported from time to time, it appears that export quotas are unlikely to be reintroduced in the near future. Despite the recent recovery in arabica prices, the arrival of new crop mild arabica coffee from Central America is expected to dampen any further recovery during the second quarter of 1990. Thereafter the approach of the Brazilian winter and the possibility of frost damage is expected to provide some support to the market. Arabica prices are expected to show a modest recovery for the year as a whole. Little increase is expected in robusta prices in 1990, owing to a high level of stocks relative to production and a distinct market preference for mild arabica coffee.

Tea

In 1987 and 1988 the price of tea was only about US$1.75 a kilogram, the lowest level in more than a decade, owing to two successive years of record world tea production. World tea output in 1988 exceeded 2.5 million tons. A fall in world tea production and exports, however, led to a recovery in the tea price to $2.50 by the end of 1989.

Tea production in India, the largest producer, consumer, and exporter of tea, is estimated to have declined by 3 percent in 1989, principally because of drought in the tea-growing areas in southern India. Output in Sri Lanka is estimated at 207,000 tons in 1989 compared to 227,000 tons in 1988, mainly as a result of unfavorable weather conditions and civil unrest. Weather conditions in Kenya, however, were favorable throughout 1989 and output there is estimated to have increased by 10 percent to a record 180,000 tons—the third record harvest in as many years. In addition, Indonesia’s output increased an estimated 12 percent in 1989, with smaller production increases estimated for Tanzania and Zimbabwe.

Exports from tea-producing countries are estimated to have declined in 1989 because of lower production and other factors. India’s tea exports declined about 5 percent as a result of the combined effects of lower production and a continuing rise in domestic consumption. Lower production and transportation and shipping problems reduced Sri Lanka’s tea exports by an estimated 14 percent in 1989, while exports from China are forecast to be about 8 percent lower. On the other hand, exports from Kenya are expected to record a 12 percent increase in 1989.

The United Kingdom, the largest importing country, saw its net imports for consumption fall an estimated 8 percent. By contrast, Pakistan’s imports increased 40 percent, while the United States and the U.S.S.R. saw their imports rise by 16 percent and 22 percent in 1989, respectively. The U.S.S.R., which normally imports orthodox tea, imported substantial quantities of CTC (crush, tear, curl) teas in 1989.

The increase in offerings of lower quality tea was associated with a decline in the London auction price in the early months of 1990. The short-term outlook is largely dependent on weather conditions in the main growing areas and on producers’ response to the recent higher prices. Stocks of tea are estimated to be quite low, especially in the importing countries. Nevertheless, if weather conditions are favorable in the main producing areas and if producers resort to coarse picking to increase production, the recent recovery in prices may well be quite short-lived.

Cocoa

Continuing the trend established during the previous four years, cocoa prices fell during 1989 under the weight of bearish market fundamentals. After falling by 50 percent (in terms of SDRs) during the 1984–88 period, prices fell by a further 18 percent in 1989. The primary cause of the price decline was an excess of world cocoa production over consumption and a resulting large buildup in world cocoa stocks. Superimposed on this secular downtrend were short-term factors that had a transient impact on prices.

As the high-yielding hybrid cocoa trees planted during the period of high real cocoa prices in the 1970s reached maturity and entered their most productive phase, world cocoa production increased at an average annual rate of 10 percent during the last five crop years. Generally favorable weather and rehabilitation of older cocoa areas, especially in Ghana, also contributed to the increase in output. In the 1988/89 crop year, world production is estimated to have increased to a record 2.4 million tons, with particularly large increases in Côte d’Ivoire (23 percent) and Ghana (60 percent). Partly in response to the sharp fall in cocoa prices, world cocoa consumption has increased at an annual rate of 4 percent during the last five crop years. Owing to the disparity between the rates of growth of world cocoa production and consumption, world cocoa stocks increased steadily from about 450 thousand tons at the end of the 1983/84 season to about 1,200 thousand tons at the end of the 1988/89 season. The ratio of stock to consumption of 57 percent at the end of the 1988/89 crop year was the highest in the period since World War II.

During 1988, tight supplies of good quality West African cocoa—prompted by Côte d’Ivoire’s reluctance to sell at prices lower than French francs 1,250 per 100 kilograms, provided some support to the market. In early 1989, however, the supply situation eased, as Ghana stepped up sales to take advantage of the large premiums for West African cocoa and supplies from a large block sale by Côte d’Ivoire came on to the market.

Prices declined during most of 1989, under the weight of the supply/demand imbalance. In the middle of the year prices rallied briefly because of reports of a large block sale by Côte d’Ivoire induced market concern about the impact of such a sale on the short-term availability of cocoa. These fears were allayed when it became evident that most of the cocoa would be resold to end users. Favorable weather in West Africa and Brazil and the failure of the International Cocoa Organization to implement any measures to support the market also contributed to a steady fall in cocoa prices. By the end of the year the ICCO cocoa price had fallen to SDR 745 per ton, the lowest level since March 1973. Prices remained low during the first quarter of 1990.

The outlook is for cocoa production and consumption to gradually move toward a better balance beginning in the 1989/90 crop year. The low level of cocoa prices has stimulated cocoa consumption and sharply reduced the profitability of cocoa production. These lower market prices have resulted in sharp reductions in the producer prices for the 1989/90 season in Cameroon and Côte d’Ivoire and reduced maintenance and use of fertilizers in Brazil and other producing countries. Although these developments are likely to affect production over time, during the 1989/90 crop year production is expected to exceed consumption for the sixth consecutive season. The overall production surplus is likely to be substantially lower than in 1988/89; nevertheless, the stocks to consumption ratio is expected to rise to a record 63 percent. At the end of the first quarter of 1990, cocoa prices were substantially above the very low level of the final quarter of 1989, largely as a result of buyers’ fears of disruptions in supplies from Côte d’Ivoire. As the rate of growth in supply slows over the medium term, prices are expected to increase.