Chapter

III Beverages

Author(s):
International Monetary Fund
Published Date:
January 1989
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Market developments relating to coffee, tea, and cocoa are discussed in this section. Although the beverage use of cocoa is secondary to its use in chocolate confectionery, cocoa is included in this group of commodities because of its traditional association with coffee and tea as a beverage and because it shares with them certain characteristics with respect to supply. Of the three commodities, coffee, which in terms of value is one of the most important commodities in international trade, has a much greater weight in the various composite indices used in the discussion than do tea and cocoa.

The demand for these commodities, which is largely determined by taste and tradition, tends to be stable and price inelastic over the short run. Except in periods of very large price changes, there is little substitution in consumption between these commodities. Variations in prices are mainly associated with weather-related short-run fluctuations and longer cyclical changes in supply in lagged response to prices for these commodities.

Owing to the dominant role of supply factors, beverage prices (Chart 5) have tended to move independently of the prices for other commodities over the last several years (see Chart 2). This pattern was repeated in both 1987 and 1988. In 1987, a large increase in production contributed to a 36 percent decline in terms of SDRs in the overall index of beverage prices (Tables 41 and 42). Although the beverage production index declined somewhat in 1988—crop year 1988/89 is the “off” year in the two-year Brazilian coffee production cycle—very large carryover stocks augmented available supplies and the price index fell by a further 4 percent.

Chart 5.Prices of Beverages in SDRs, January 1980–April 1989

(1980 = 100)
Table 41.Prices of Beverages, 1979–First Quarter 1989
Coffee
YearsIndex of

Prices of

Beverages1
“Other mild”

arabica2

(Pound)
Robusta3

(Pound)
Tea4

(Kilogram)
Cocoa

Beans5

(Tons)
(1980 = 100)(In SDRs)
1979115.31.341.281.672.549
1980100.01.181.131.712.000
198187.41.090.871.711.763
198293.81.271.011.751.574
1983105.01.231.162.171.985
1984126.91.411.353.372.335
1985113.21.431.191.972.220
1986113.31.651.271.641.765
198773.80.870.791.321.546
198870.81.010.711.331.177
1987I78.00.910.851.491.573
II71.90.840.791.101.580
III71.20.810.751.231.603
IV74.10.910.781.451.428
1988I73.70.970.751.461.330
II70.61.010.701.271,211
III68.51.040.661.181.104
IV70.31.010.721.411.061
1989I73.41.080.741.401.098
(1980 = 100)(In U.S. dollars)
1979114.41.741.652.163.293
1980100.01.541.472.232.603
198179.21.281.032.022.077
198279.61.401.111.931.742
198386.11.321.242.322.119
1984100.01.441.383.462.396
198588.31.461.211.982.255
1986101.81.931.481.932.068
198773.31.121.021.711.998
198873.21.350.951.791.584
1987I75.61.141.081.881.984
II71.51.091.021.432.046
III69.81.030.961.572,046
IV76.41.231.051.951.916
1988I77.41.331.021.991.819
II74.21.380.951.741.657
III68.31.340.861.531.432
IV72.71.360.971.901.427
1989I74.21.420.981.841.444
Source: Commodities Division. IMF Research Department.
Table 42.Movements in the Prices of Beverages and Related Economic Indicators, 1982–88(Annual percentage change)
1982198319841985198619871988
Prices of beverages1
In SDRs7.311.920.9–10.80.0–34.9–4.1
In U.S. dollars0.48.216.1–11.715.3–28.0–0.1
Real22.611.419.6–12.3–2.0–35.9–5.8
Consumer price index in major industrial countries3
In SDRs6.74.94.63.51.00.53.0
In U.S. dollars–0.11.60.32.516.710.77.0
Real GNP in major industrial countries3–0.42.95.13.42.73.44.2
World consumption of beverages4
Index of consumption52.10.03.4–0.72.71.92.2
World supply of beverages4
Index of production–13.15.19.34.0–9.920.0–4.1
Index of supply6–2.20.64.32.0–4.110.54.9
Index of closing stocks–9.1–7.6–4.814.3–13.236.05.2
Sources: Commodities Division and Current Studies Division, IMF Research Department.

Coffee

For coffee the principal physical markets (as opposed to futures markets) are located in New York and London. Smaller physical markets are located in Bremen, Hamburg, Le Havre, and Marseilles, as well as in the main coffee producing countries. The two largest futures markets for coffee are also located in New York and London. The New York market trades in futures contracts for mild arabica coffees, while the London market trades in robusta coffee futures contracts.

A drought in the coffee producing areas of Brazil, which reduced the 1986/87 (April–March) Brazilian crop, caused world coffee prices to rise sharply in late 1985 and early 1986.53 As a result of the rise in prices, export quotas under the 1983 International Coffee Agreement were increased in November and December 1985 and completely suspended in February 1986. The drought reduced the 1986/87 Brazilian coffee crop by about 40 percent to 15 million 60-kilogram bags as compared with a crop of about 25 million bags that might have been expected with normal weather in an “off year” of the two-year arabica coffee production cycle. The period of high prices was quite transient, however. Prices weakened beginning in April 1986 and continued to fall in subsequent months because of a large rise in exports following the suspension of export quotas and on account of indications that the drought would have little or no long-term effect on coffee production in Brazil. Prices recovered briefly in September 1986 owing to another spell of dry weather in Brazil but declined during the final quarter of 1986 and most of 1987. The fall in prices is attributable to a failure by the members of the International Coffee Organization (ICO) to agree on the reintroduction of quotas and the prospect of a recovery in the 1987/88 Brazilian coffee crop. In fact, the 1987/88 Brazilian crop was a record 43 million bags.

After protracted negotiations, in October 1987 the International Coffee Council agreed to reintroduce export quotas for the 1987/88 coffee year. The initial global quota was set at 58 million 60-kilogram bags—the same level as at the beginning of the 1985/86 coffee year. The range between which prices are to be stabilized was also left unchanged at $1.20 and $1.40 a pound.54 As the composite indicator price was well below the floor price of the stabilization range, the Council also agreed on supplementary measures permitting quota cuts of up to 4 million bags during the October-to-December 1987 quarter. The impact on prices of the reintroduction of quotas and an immediate quota cut of 1.5 million bags in early October was quite muted because of weak import demand reflecting a high level of coffee stocks in consuming countries and large shipments at the end of the 1986/87 coffee year. The transitional arrangements for the first quarter of the coffee year were not implemented during the rest of the quarter because the composite indicator price remained just above $1.15 a pound.

The price differential between robusta and other mild arabica coffees, which historically has been at about 10 percent, widened considerably during the course of the 1987/88 coffee year owing to a shortage of quality Colombian and other mild arabica coffees and a surfeit of robusta and low-quality arabica coffees. In the period between February 1986 and the end of September 1987, when quotas were not in effect and real prices of coffee were quite low, processors in North America and Western Europe increased the proportion of high-quality arabicas in their blends. It appears that there may be a distinct consumer preference for this type of coffee, which had been masked by the application of ICO export quotas. During the 1986/87 coffee year, when export quotas were not in effect, exports of other mild and Colombian mild coffees accounted for 51.5 percent of exports by ICO members to importing members. When quotas were reintroduced at the beginning of the 1987/88 coffee year, the share of other milds and Colombian milds was reduced to 43 percent of the total quota. The impact of the discrepancy between the quota allocated for other mild arabica coffees and the underlying market demand for these types of coffee was not evident in the price differential between robusta and mild arabica coffees during the last quarter of 1987 because of large stocks in consuming countries and shipments in transit. The differential widened substantially, however, during 1988.

Two quota cuts of one million bags each were triggered in January 1988 because the composite indicator price continued to remain below $1.20 a pound. Prices recovered in February and moved above the $ 1.20 a pound level for a brief period on account of a sharp increase in the price of other mild coffees. This increase was caused by high seasonal roaster demand, undershipment of quotas during the fourth quarter of 1987, and speculative purchases on futures markets. Weak robusta prices caused the indicator price to fall below the $1.20 a pound level in March 1988, and despite two more quota cuts of 1.5 million bags each in July, the indicator price continued to remain below the $1.20 a pound level until the end of September 1988. Thus, in spite of five quota cuts amounting to a total reduction of 6.5 million bags in the quota for the 1987/88 coffee year, coffee prices remained below the lower level of the price stabilization range during 11 months of the year. Despite the quota cuts, supplies of robusta coffee continued to be plentiful throughout the 1987/88 coffee year and robusta prices remained weak.

The main impact of the pro rata quota cuts was to further reduce the availability of the mild arabica coffees for which demand was strong. This led to a strengthening in prices for arabica coffee and to a widening of the price differential between robusta and other mild (arabica) coffees. The price differential for other mild coffees over robusta coffee, which increased from 11 percent in September 1987 to 20 percent in December 1987, widened further to 63 percent in July 1988 before narrowing to 50 percent in September 1988.

After declining to 83 million bags in the 1985/86 international coffee year (October–September) on account of the severe drought in Brazil, world coffee production recovered to 96 million bags in 1986/87 and to nearly 97 million bags in 1987/88 largely as a result of a recovery in Brazilian coffee production (Table 43). In addition, coffee production in Colombia increased from 10.8 million bags in 1986/87 to 13.2 million bags in 1987/88, while coffee production in India declined from 3.7 million bags to 2 million bags during the same period. The recovery in Brazilian production, which is mainly unwashed arabica coffee, caused the share of arabica coffee in total world production to rise from 75 percent in 1985/86 to 79 percent in 1987/88. Lower production in member countries of the Organisation Africaine et Malgache du Café (OAMCAF) reduced world robusta production from 21.4 million bags in 1986/87 to 19.7 million bags in 1987/88.

Table 43.Coffee: World Commodity Balance, 1982/83–88/89(In millions of 60-kilogram bags)
October–September Crop Year
1982/831983/841984/851985/861986/871987/881988/891
Production90.785.988.682.996.096.793.4
Brazil23.424.725.922.829.231.825.3
Colombia12.313.011.011.810.813.212.2
Other countries255.048.251.748.356.051.755.9
Consumption86.285.385.684.886.487.388.5
Exporting countries20.118.619.319.219.819.219.7
Brazil7.77.37.07.07.07.58.0
Colombia1.91.61.82.01.71.81.8
Other countries210.59.710.510.211.19.99.9
Importing countries66.166.766.365.666.668.568.8
ICO members356.656.155.857.159.060.060.0
Nonmembers49.510.610.58.57.68.58.8
Losses51.31.41.41.41.41.61.6
Closing stocks64.964.165.762.470.678.481.7
In exporting countries54.351.151.044.847.660.065.6
Brazil15.412.813.416.320.327.028.3
Colombia11.312.712.310.67.69.511.5
Other countries227.625.625.317.919.723.525.8
Other stocks10.613.014.717.623.018.416.1
Inventories in importing countries4.45.05.47.36.76.86.7
Stocks in free ports1.92.62.83.74.93.83.6
Afloat, etc.64.35.46.56.611.47.85.8
Stocks/consumption ratio (in percent)75751174829092
Source: Based on statistics of the International Coffee Organization (ICO).

World coffee consumption has increased at an annual rate of about 1.3 percent in 1986/87 and 1987/88. Consumption in importing countries accounts for about 77 percent of total world coffee consumption; the remainder—about 19–20 million bags each year—is consumed in the exporting countries. High coffee prices led to a decline in consumption in the importing countries, to 65.6 million bags in 1985/86. As prices fell in 1986/87 and 1987/88, consumption recovered to 66.6 million bags and 68.5 million bags, respectively. Despite the low price level during these two crop years, coffee consumption in the principal importing countries in Western Europe and North America grew at a slow rate because demand for coffee in these well-established and mature markets is inelastic with respect to both price and income. Growth in coffee consumption has also been hampered by the fact that a large drop in green coffee prices has not been reflected by a corresponding percentage drop in retail prices for roasted and soluble coffee, largely because processing and marketing margins tend to be relatively stable over time. In addition, the growth in coffee consumption in these markets has been restrained by competition from soft drinks and other beverages.

ICO data indicate that household purchases of coffee in the United States declined from 9.27 million bags in 1984/85 to 9.11 million bags in 1985/86 when coffee prices rose sharply. Thereafter, falling prices contributed to a rise in household purchases, to recover to 9.25 million bags in 1986/87 but in 1987/88 despite a continuing drop in prices, consumption declined to 8.60 million bags. These results are corroborated by another ICO study that shows that after increasing slightly in 1987, per capita consumption in the United States appears to have resumed its downward trend. Household purchases in ten European importing members held steady during this period, at between 16.3 and 16.5 million bags, respectively. Coffee consumption in Japan, on the other hand, has increased at an annual rate of about 3.8 percent during the last five years because coffee is a relatively new product with a high income elasticity of demand. Coffee is promoted as a young person’s drink in Japan and competes more directly with soft drinks than in many other countries.

The excess of world coffee consumption over production in 1985/86 led to declines in world coffee stocks from 66 million bags by the end of the 1984/85 coffee year to little more than 62 million bags by the end of 1985/86. With the recovery in world coffee production and slow growth in consumption, closing stocks rose to over 70 million bags in 1986/87 and to an estimated level of 78 million bags in 1987/88. The level of stocks afloat and in free ports increased at the end of 1986/87 on account of large shipments made prior to the reintroduction of quotas in October 1987. The reimposition of export quotas contributed to the sharp increase in stocks in exporting countries by the end of 1987/88.

Earnings from coffee exports rose from $10.5 billion in 1985 to $13.8 billion in 1986 owing to sharply higher world coffee prices (Table 44). Despite the suspension of quotas in February 1986, export volume declined by 400 thousand tons because high prices curtailed import demand. In 1987, low market prices and an absence of quotas during nine months of the year, led to a recovery in exports to 4.2 million tons. Earnings, however, declined to $9.2 billion because of low market prices and export unit values. Although the volume of exports was constrained by export quotas, earnings are estimated to have increased to $9.6 billion in 1988, on account of some recovery in world market prices.

Table 44.Coffee: Export Earnings, 1985–88
1985198619871988119851986198719881
(In SDRs)(In U.S. dollars)
Earnings (in billions)10.411.87.17.110.513.89.29.6
Developing countries10.411.87.17.110.513.89.29.5
To ICO members29.210.76.36.39.312.58.28.5
To nonmembers of ICO1.21.10.80.71.21.31.01.0
Unit values (a ton)2,4803,1401,7101,8302,5103,6802,2202,460
To ICO countries2,5403,1301,7601,9202,5803,6802,2802,580
To nonmembers of ICO1,9702,7701,2901,3602,0003,2501,6701,830
Market prices
ICO daily composite indicator (a ton)2,9003,2001,8301,8902,9403,7602,3702,540
Other milds33,1603,6201,9202,2203,2104,2502,4802,980
Robusta42,6302,7901,7401,5602,6703,2702,2602,100
(In millions of tons)
Volumes4.23.84.23.94.23.84.23.9
Developing countries4.23.84.23.94.23.84.23.9
To ICO members23.63.43.63.33.63.43.63.3
To nonmembers of ICO0.60.40.60.60.60.40.60.6
Sources: Export data are based on statistics of the International Coffee Organization (ICO); and Commodities Division, IMF Research Department, for market prices.

In the period between March 1986 and October 1987, when quotas were not in effect, the differential in export unit values of sales to quota and nonquota markets narrowed considerably. Discount sales to nonmembers of the ICO became a cause of major concern to the Executive Board of the ICO during 1987/88. The International Coffee Agreement contains control measures and penalties to prevent sales to nonquota markets at discounted prices and to prevent coffee leaking from nonquota markets into quota markets. In practice, however, sales to nonquota markets have been difficult to monitor.

In early October 1988, the ICO agreed on an effective global annual quota of 56.0 million bags for the 1988/89 coffee year. Under the transitional provisions for the first quarter of the coffee year, two quota increases of 1.0 million bags each could be distributed if the 15-day moving average of the composite indicator price exceeded $1.14 a pound. No quota cuts were permitted during the first quarter. The quota distribution was determined by means of a formula that took account of exportable production, previous exports, and the level of stocks. Despite an apparent shortage of Colombian and other mild coffees, the application of the formula resulted in a reduction in the share of Colombian milds in the total quota and left the share of arabica coffee unchanged. The apparent shortage of mild arabica coffees was partly addressed by the rules governing the manner in which quota increases and quota cuts are distributed between producers of arabica and robusta coffees. Under the transitional provisions for the first quarter of 1988/89, increases were to be apportioned between exporters of arabica and robusta coffees according to the differential between the 15-day moving averages of the other milds and robusta indicator prices. Owing to a large differential between the indicator prices for other mild arabica coffee and robusta coffee, two quota increases of 1.0 million bags each during the first quarter of the coffee year were both distributed, in their entirety, among arabica producing members of the ICO. Since January 1, 1989, the floor and ceiling prices of the $1.20 to $1.40 target range have served as the triggers for pro rata quota cuts and increases; however, the distribution of quota cuts and increases between the arabica and robusta group of members entitled to basic quota have continued to be determined by the 15-day moving averages of the other milds and robusta prices. Weak robusta prices triggered two quota cuts of each during the first quarter of 1989, and a further quota cut in April 1989. As the 15-day average of the other milds indicator price was above $1.30 a pound, the three quota cuts were applied, on a pro rata basis, only to exporters of robusta coffee. As a result the basic quota for robusta coffee was reduced by 818 thousand bags; while the quotas for arabica coffees remained unchanged.

World coffee production is expected to decline by about 3.3 million bags in the 1988/89 international coffee year largely because of a drop in production in Brazil that is likely to be partly offset, however, by increased production in other countries. Production in the 1988/89 Brazilian crop year (April–March) will be affected by the “off year” of the two-year arabica production cycle, frosts in July 1988, and very dry weather during the fourth quarter of 1988. On an international crop year basis, Brazilian production is expected to decline from 32 million bags in 1987/88 to 25 million bags in 1988/89. Production in India, on the other hand, is expected to increase by more than 60 percent, from 2.0 million bags to 3.3 million bags, because of the “on year” in India of the biannual arabica production cycle. Robusta production is projected to rise by 2.2 million bags largely on account of an anticipated production increase in OAMCAF member countries. World coffee consumption will continue to lag behind world production owing to the slow rate of growth in consumption in the main coffee importing countries, supply constraints stemming from the ICO quotas, and a scarcity of higher quality mild arabica coffees. As a result of these developments, closing stocks are expected to rise by 4 million bags to 82 million bags. The ICO composite indicator price is expected to remain near the midpoint of the target price range and the differential between prices for other mild and robusta coffees is expected to continue to remain large.

The current coffee agreement will expire at the end of September 1989 unless it is extended. Devising a means of eliminating discount sales to nonmembers and introducing greater selectivity into the quota allocation process to ensure consumers adequate supplies of high quality mild arabica coffees are likely to be two particularly contentious issues in the negotiations on a new coffee agreement. Coffee price movements beyond the end of the 1988/89 coffee year will depend crucially on the outcome of these negotiations. Failure to conclude a new agreement, or to extend the current agreement, will most likely result in a sharp drop in prices.

Tea

Tea has traditionally been sold at auctions in London and in the major tea producing countries. The volume of tea auctioned in London declined during the 1970s because of declining tea consumption in the United Kingdom and an increase in the volume of tea sold through auctions in the tea producing countries. Currently, auction centers in producing countries account for about 90 percent of all auction sales of tea. Tea is also sold directly by producers to foreign importers either on an “ex garden” basis or on forward contracts.

Tea prices rose substantially in 1983 and 1984 but declined sharply in each of the following three years. The average annual price of tea increased from $1.93 a kilogram in 1982 to $2.32 a kilogram in 1983, peaking at $4.29 a kilogram in January 1984. Prices, which averaged $3.46 a kilogram in 1984, fell to an average of $1.98 a kilogram in 1985 and continued to drop to $1.93 a kilogram and $1.71 a kilogram in 1986 and 1987, respectively.55 Prices remained low at $1.79 a kilogram in 1988 before recovering slightly to $1.84 a kilogram during the first quarter of 1989.

The boom in tea prices, which lasted from the fourth quarter of 1983 to the first quarter of 1985, resulted from a drought in 1983 in India and Sri Lanka and a partial ban on tea exports imposed by India to protect the supply of tea in the domestic market. In 1984, world tea supplies increased by 6 percent and by a further 5 percent in 1985 as production rose in response to the high prices (Table 45). Although tea is a perennial crop with a long gestation period, the supply of tea is fairly elastic with respect to price because output can be increased significantly in the short run by “coarse plucking” of more than the usual number of leaves. World tea production in 1986 was virtually unchanged from 1985 on account of weather-related production declines in India and Kenya, which were largely offset by an increase in green tea production in China. Prices remained relatively stable during 1986.

Table 45.Tea: World Commodity Balance, 1982–88(In thousands of tons)
19821983198419851986198719881
Production1,9302,0302,1602,2602,2402,3402,460
Green tea420430420420440490510
China250240240240260300320
Other countries170190180180180190190
Black tea1,5101,6001,7401,8401,8001,8501,950
India560580640660620670710
Kenya100120120150140160160
Sri Lanka190180210210210210240
Other countries660720770820830810840
Consumption (black and green)1,9202,0002,1302,2202,1902,3202,410
Tea producing countries21,1101,1601,2201,3101,2701,3701,430
China180280270300290230260
India370370420440420470480
Japan100100909090100100
U.S.S.R.140150150150150140150
Other countries320260290330320430440
Tea importing countries3800840910910920950980
Asian countries200230260250250270280
United Kingdom170170180160160160170
Other countries430440470500510520530
Implied change in total stocks10303040602050
Closing stocks in the United Kingdom49394747503750
Sources: Estimates of Commodities Division, IMF Research Department, derived from statistics of the International Tea Committee and the UN Food and Agriculture Organization.

In 1987, world tea production reached a record 2.3 million tons owing to an increase in production in most of the major tea producing countries. Production in India increased by 8 percent mainly because of favorable weather throughout the year. China also harvested a record crop of 508 thousand tons, of which about 60 percent was green tea. Although production in Sri Lanka was affected by dry weather during the first half of the year, a recovery in output during the second half caused output for the year to remain unchanged. In Kenya, ideal weather in 1987 contributed to a record harvest of 160 thousand tons. The weather was favorable in most of the major tea producing countries in 1988, and, despite the very low level of real tea prices, world tea production is estimated to have increased to a record level of 2.5 million tons. Substantial production increases are estimated for India, Sri Lanka, Indonesia, and a number of smaller tea producing countries. In recent years, partly because of the low level of tea prices, much of the increase in production in the major tea producing countries has been principally due to improved yields as opposed to an increase in the area under tea cultivation.

The pattern of world tea consumption has changed significantly during the last two decades. Competition from soft drinks and other beverages and a change in the beverage consumption habits of younger groups has caused tea consumption in the developed market economy countries to stagnate or in some cases even decline. Apparent per capita tea consumption in the United Kingdom, the world’s largest tea consuming country, declined from a peak of 4.50 kilograms in 1961 to 2.77 kilograms in 1984–86. Similarly, imports into the United Kingdom declined from a peak of 240 thousand tons in 1961 to 160 thousand tons in 1987. On the other hand, population and income growth has contributed to a rapid increase in tea consumption in the Middle East, North Africa, South Asia, and the U.S.S.R. Between 1970 and 1986, tea consumption in India grew at an annual rate of 4.5 percent while consumption in Pakistan increased at a rate of 6.5 percent. During the same period, consumption in the U.S.S.R. increased by 6.3 percent and in the Islamic Republic of Iran and Iraq it rose at annual average rates of 4.4 percent and 5.6 percent, respectively. Consumption in Africa increased at 4.2 percent in the same period, mainly on account of increased consumption in Egypt, Morocco, and Tunisia. More recently the growth in tea consumption in the petroleum exporting countries has slowed perhaps on account of declining revenues associated with the fall in petroleum prices.

The sharp price decline since 1985 lowered earnings from tea exports from $2.1 billion in 1985 to $1.7 billion in 1986 (Table 46). In 1987, a small increase in export volume more than offset a continuing fall in export unit values and earnings rose slightly to $1.8 billion. Earnings are estimated to have recovered to $2.0 billion in 1988 because of a small increase in both export volume and export unit value. Earnings in terms of SDRs plummeted between 1985 and 1987 on account of a depreciation in the value of the U.S. dollar. In SDR terms, earnings from tea exports declined from SDR 2.0 billion in 1985 to SDR 1.4 billion in 1987 before recovering slightly to SDR 1.5 billion in 1988.

Table 46.Tea: Export Earnings, 1985–88
1985198619871988119851986198719881
(In SDRs)(In U.S. dollars)
Earnings (in billions)2.01.51.41.52.11.71.82.0
Developing countries2.01.51.41.52.11.71.82.0
Unit values (a ton)2,0201,4701,4001,4102,0501,7201,8101,890
Market prices (a ton)21,9501,6401,3201,3301,9801,9301,7101,790
(In thousands of tons)
Volumes1,0091,0181,0181,0651,0091,0181,0181,065
Developing countries1,0091,0181,0181,0651,0091,0181,0181,065
India222203204220222203204220
Kenya139133150156139133150156
Sri Lanka198208201213198208201213
Other450474463476450474463476
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; Commodities Division, IMF Research Department, for market prices.

Over the next several years, production in high-cost countries is likely to stagnate on account of declining profitability, but because of cost reductions through higher yields, production in other countries, such as India and Kenya, will continue to expand. A large part of the rise in production in these two countries is likely to be absorbed by increased domestic consumption. Consumption in the developing countries and the U.S.S.R. is expected to continue to grow owing to the low level of prices and population growth, although import demand for tea in the U.S.S.R. may be constrained by the availability of foreign exchange. Similarly, developments in oil prices will be an important determinant of tea import demand in the oil exporting countries. As tea production and tea consumption move into better balance, prices can be expected to recover from their current low levels.

Cocoa

Cocoa is traded both on physical and futures, or terminal, markets. The purpose of the main physical markets for cocoa, located in London, New York, and Paris, is to ensure the actual “physical” delivery of cocoa. Transactions on the physical markets, which can be for immediate (or spot) delivery or for forward delivery, are normally carried out by telephone or telex. Prices for transactions on the physical market are usually set by reference to prices on the futures market. The main futures markets for cocoa also are located in London, New York, and Paris. These markets are used mainly for financial risk management. Trading in these markets is conducted on the basis of standardized contracts for future delivery. Though these futures markets are limited to the physical markets by the delivery clauses in the futures contracts, only a very small proportion of contracts result in actual delivery of the physical commodity.

Cocoa prices, which have been declining for a number of years, fell sharply during 1988 because of excess supplies carried over from the previous four crop years and the prospect of another surplus in the 1988/89 (October–September) crop year. Monthly averages of the International Cocoa Organization (ICCO) daily prices, which are the averages of futures market prices on the London Cocoa Terminal Market and the New York Cocoa, Coffee, and Sugar Exchange, fell from $2,255 a ton in 1985 to $2,068 a ton in 1986 and $1,998 a ton in 1987. Prices declined sharply during most of 1988 when it became apparent that production would exceed consumption for the fourth consecutive year. Despite purchases by the buffer stock of the ICCO and a “no sales policy” by Côte d’Ivoire—the world’s largest cocoa producer—prices had declined to little more than $1,200 a ton by September 1988. Prices increased to over $1,500 in December, however, mainly on account of news reports of an arrangement between Côte d’Ivoire and a French trading company to purchase and store a large amount of Ivoirien cocoa in Europe.

Because of the long gestation period and perennial nature of the crop, cocoa producers have adjusted to price changes only after long time lags. The possibilities for changing the level of production in the short run, by varying the level of inputs or the intensity of harvesting, are quite limited. Consequently, the short-run elasticity of supply tends to be quite low. The longer-term price elasticity of supply, however, tends to be higher because of the level by which production can be adjusted by varying the area under cultivation or adopting new production technologies. Longer-run supply changes have imparted a cyclical pattern to cocoa production and prices; low production and high prices tend to encourage increased plantings, which, after a lag of several years, are followed by a period of much higher production and lower prices. The short-term effects of unfavorable weather patterns are superimposed on this underlying long-term cyclical pattern.

A sharp increase in world cocoa production in lagged response to the high real prices of the mid-1970s is largely responsible for the excess supply that has characterized the world cocoa market in eight of the last ten years. Mainly as a result of large-scale new plantings with high-yielding hybrid varieties and the rehabilitation of older areas, world cocoa production increased by 40 percent in the period from 1977/87 to 1987/88. The total area under cultivation expanded from 4.17 million hectares to 4.50 million hectares during this period. Particularly large production increases were recorded in Côte d’Ivoire where cocoa is mainly a smallholder crop; officially sponsored new planting and rehabilitation schemes contributed to the growth in the area under cultivation—from 0.95 million hectares in 1976/77 to 1.35 million hectares in 1986/87. The area under high-yielding hybrid varieties increased from 80 thousand hectares to 210 thousand hectares during the same period. Similarly, the area under cocoa cultivation in Brazil increased from 486 thousand hectares to 708 thousand hectares over the same period, while the area under high-yielding varieties more than quadrupled, from 80 thousand hectares to 345 thousand hectares. In Malaysia, which has a long tradition of tree crop agriculture, cocoa cultivation has been rapidly adopted by smallholders and large estates. There has been a more than sixfold increase in the area under cultivation from 49 thousand hectares in 1976/77 to 315 thousand hectares in 1986/87. All of the areas under cultivation in Malaysia are planted with high-yielding hybrid varieties. On the other hand, in Ghana which was the largest cocoa producing country in the world in 1976/77, the area under cocoa cultivation has declined from 1.23 million hectares in 1976/77 to 0.91 million hectares in 1986/87 primarily because of low real producer prices for cocoa. Similarly, the area under cultivation in Nigeria declined from 625 thousand hectares to 470 thousand hectares during the same period.

The above changes in the total area under cocoa cultivation and the increase in the area under high-yielding varieties has had a major impact on both total world cocoa production and its geographical distribution. During the last decade, world cocoa production increased from 1,513 thousand tons to 2,104 thousand tons (3.3 percent annually, on average). Production in Côte d’Ivoire more than doubled—from 300 thousand tons in 1977/87 to 660 thousand tons in 1987/88. During the same period, production in Brazil increased from 280 thousand tons to 400 thousand tons and Malaysian production increased from 170 thousand tons to 230 thousand tons. Malaysia currently accounts for about 11 percent of total world cocoa production. Efforts to rehabilitate and modernize the industry appear to have arrested a long-term decline in cocoa production in Ghana, where production reached a nadir of 160 thousand tons in 1983/84 before recovering to 230 thousand tons in 1986/87. Dry weather caused production to decline to 190 thousand tons in 1987/88. With the increase of cocoa production in Asia, world production has become geographically more dispersed. This development, which is expected to continue, is likely to increase the stability of world cocoa supplies because total world cocoa production would be less susceptible to the weather in any one of the major cocoa producing regions.

The demand for cocoa is derived from the demand for chocolate and other cocoa-based products. The price and income elasticities of demand for cocoa are quite low because two thirds of world cocoa is consumed in long-established and mature markets in North America and Western Europe. Japan and the U.S.S.R. are other important cocoa consuming countries. Price and income elasticities of demand for cocoa tend to be high in developing countries. After stagnating for most of the 1970s, world cocoa consumption has grown at an average annual rate of about 3 percent during the 1980s, mainly because of a fall in real cocoa prices and a rise in real GDP in the traditional cocoa markets in North America and Western Europe. An increase in the level of vertical integration and concentration in the cocoa processing and manufacturing industries in the main consuming countries has resulted in a concomitant fall in competition through price. This has probably attenuated the effect that falling cocoa prices have on consumption because low cocoa prices are often not reflected in the price movements for chocolates and other cocoa-based confectionery products. More recently, the effect of falling cocoa prices has to some extent been offset by a rise in the price of sugar, which is one of the main ingredients of chocolate and other confectionery products.

As a result of the differential rates of growth in world cocoa production and consumption there has been a large buildup of world cocoa stocks. The ratio of end-of-season stocks to total consumption, as measured by grindings, rose from 27 percent in 1983/84 to 45 percent in 1987/88, when the level of stocks was equivalent to more than five months of world cocoa consumption in 1987/88 (Table 47). Of this amount 250 thousand tons are held in the buffer stock of the ICCO. These buffer stock holdings consist of 100 thousand tons purchased under the 1980 Agreement and transferred to the 1986 Agreement, 75 thousand tons purchased during May–June 1987 and a further 75 thousand tons purchased during January–February 1988. Buffer stock purchases ceased at the end of February 1988 when the buffer stock had reached its capacity of 250 thousand tons. A lack of agreement in the ICCO on a further revision of the intervention prices and large arrears in the payment of export levies collected by producing members has effectively precluded any agreement on the modalities for the implementation of the withholding scheme.

Table 47.Cocoa Beans: World Commodity Balance, 1982/83–88/89(In thousands of tons)
October–September Crop Year
1982/831983/841984/851985/861986/871987/881988/891
Gross production1,5301,5001,9601,9602,0202,1602,270
Brazil330300410370360400380
Cameroon110110120120120130130
Côte d’Ivoire360410570580620660680
Ecuador4040130110908080
Ghana180160180220230190250
Malaysia7080100120170230250
Nigeria160120160110100150140
Other countries280280290330330320360
Production adjusted for loss in weights1,5101,4901,9401,9402,0002,1402,240
Grindings (consumption)1,6301,7001,8501,8401,9101,9902,090
Cocoa bean producing countries480510600640600630650
European Community580610640630650720740
U.S.S.R.150140160140160150160
United States190210200190230240260
Other countries230230250240270250280
Closing stocks6704605506507408901,040
Commercial stocks570360450550560640790
ICCO stocks100100100100175250250
Stocks/grindings ratio (in percent)41273035394550
Source: International Cocoa Organization (ICCO), Quarterly Bulletin of Cocoa Statistics (London), various issues.

The price-depressing effect of this stock buildup was particularly pronounced because the buildup occurred during a period when the requirement for stocks relative to consumption was falling because of improvements in transportation and shipping in producing countries as well as changes in inventory management techniques in consuming countries. The increase in concentration in the cocoa bean processing and manufacturing industries has also tended to reduce the need for cocoa stocks. With the ICCO effectively out of the market and the prospect of a sharp increase in world stocks, monthly prices fell to $1,239 a ton in September 1988. A shortage of West African cocoa in the physical market, owing to the sales policy of Côte d’Ivoire, caused the premium for this type of cocoa to rise sharply during the second and especially the third quarter of the year. News reports of a scheme by Côte d’Ivoire to remove up to 400 thousand tons of its cocoa from the world market by selling it to a French trading company that would then store it in Europe caused prices to recover during November and December. Prices averaged $1,427 a ton during the final quarter of 1988 and $1,444 a ton during the first quarter of 1989.

Between 1985 and 1987, earnings of developing countries from exports of cocoa beans and cocoa products remained stable at between $3.7 billion and $3.9 billion a year because the effect of a gradual fall in prices was largely offset by an increase in export volume (Table 48). In 1988, however, earnings of developing countries from cocoa bean and cocoa product exports are estimated to have declined sharply to $3.0 billion because market prices fell by 21 percent; total cocoa export volume is estimated to have increased by only 5 percent. Owing to the depreciation of the U.S. dollar, total earnings of developing countries from exports of cocoa beans and cocoa products declined steadily from SDR 3.7 billion in 1985 to SDR 2.9 billion in 1987 and an estimated level of SDR 2.2 billion in 1988.

Table 48.Cocoa: Export Earnings, 1985–88
1985198619871988119851986198719881
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Beans2.72.52.21.62.72.92.82.2
Developing countries2.72.52.21.62.72.92.82.2
Products22.01.81.51.32.02.01.91.7
Developing countries1.00.90.70.61.01.00.90.8
Industrial countries1.00.90.80.71.01.01.00.9
Unit values (a ton)
Beans2,0201,7601,4901,1002,0502,0601,9301,480
Developing countries2,0201,7601,4901,1002,0502,0601,9301,480
Products23,0302,5802,2201,7803,0803,0302,8702,390
Developing countries2,7902,1701,9501,4902,8302,5402,5202,000
Industrial countries3,4503,2402,7602,1603,5003,8003,5702,900
Market prices of cocoa beans (a ton)32,2301,7601,5501,1802,2602,0702,0001,580
(In thousands of tons)
Volumes
Beans1,3041,4101,4291,4851,3041,4101,4291,485
Developing countries1,3041,4101,4291,4851,3041,4101,4291,485
Products2649659662710649659662710
Developing countries367389371400367389371400
Industrial countries282270291310282270291310
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; for cocoa beans, export data include only exports from cocoa bean producing countries; Commodities Division, IMF Research Department, for market prices.

It appears that world cocoa production in the 1988/89 cocoa season will once again record a substantial increase and exceed world cocoa consumption for the fourth consecutive season. Despite the sharp fall in world cocoa prices, production is expected to continue to increase as new plantings come into production and young trees reach their optimum bearing age. Favorable growing conditions in Côte d’Ivoire and a high producer price are expected to contribute to another record crop in that country. Similarly production in Malaysia is also expected to increase substantially. In Brazil, production is expected to stabilize around a level of 400 thousand tons, because low cocoa prices and a high domestic rate of inflation have reduced the profitability of cocoa cultivation. High world market prices for West African cocoa and the continuing rehabilitation and development of the industry in Ghana and Nigeria are expected to contribute to a continued recovery in output in these countries. In Ghana, increasing output from new plantings in the western part of the country is expected to more than compensate for the declining productivity of trees in the Ashanti region. Higher returns to producers following the abolition of the Marketing Board are expected to contribute to a continued recovery in cocoa production in Nigeria.

The growth in cocoa consumption that has taken place because of the steep fall in real cocoa prices is expected to continue. Competition through reductions in the nominal prices of chocolate and other chocolate products is likely to be reduced on account of growing concentration in the cocoa manufacturing industry although increased nonprice competition through product differentiation and larger promotional expenditures will likely result in increased cocoa consumption. The structural imbalance between world cocoa production and consumption is expected to continue for several more years.

With world stocks already at record levels, and a projected surplus of production over consumption for the 1988/89 season, the outlook for cocoa prices in 1989 is quite bearish. The substantial quantity of Ivoirien cocoa reportedly destined for longer-term storage in Europe is likely to overhang the market and inhibit any significant recovery in prices. Lack of agreement in the ICCO on the modalities for the implementation of the withholding scheme and mounting arrears in the payment of export levies appear likely to preclude any intervention by the organization to support market prices. Indeed, a lack of funds may necessitate premature liquidation of a small part of the ICCO buffer stock to pay operating expenses.

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