Abstract
The International coffee market, after an unusually long period of relative shortage and high prices, entered in the late fifties the surplus phase of the coffee cycle. This paper, after surveying the current situation and future prospects, which differ for different types of coffee and producing areas, attempts some quantitative appraisal of the problems facing producing countries. Data on prospective output and demand suggest that—unless steps are taken to restore the balance—production over the next five or six years will exceed demand by some 25-30 per cent. In view of the very inelastic demand, prices would have to decline to unprecedentedly low levels, perhaps to less than one third of what they are now, in order to equate consumption to prospective output. Total receipts for coffee exports, which have declined considerably in recent years, would be reduced to half, or less than half, of their current level.
The International coffee market, after an unusually long period of relative shortage and high prices, entered in the late fifties the surplus phase of the coffee cycle. This paper, after surveying the current situation and future prospects, which differ for different types of coffee and producing areas, attempts some quantitative appraisal of the problems facing producing countries. Data on prospective output and demand suggest that—unless steps are taken to restore the balance—production over the next five or six years will exceed demand by some 25-30 per cent. In view of the very inelastic demand, prices would have to decline to unprecedentedly low levels, perhaps to less than one third of what they are now, in order to equate consumption to prospective output. Total receipts for coffee exports, which have declined considerably in recent years, would be reduced to half, or less than half, of their current level.
Conditions call for drastic steps to scale down production, but it would take some time to carry out the necessary adjustments. Meanwhile, measures are required to maintain export earnings of producing countries. Alternative procedures for that purpose—compensatory measures or price stabilization—are briefly discussed in relation to the particular market conditions, and the conclusion is reached that an agreement based on export quotas, which could be built on present arrangements, might provide a workable solution.
Conditions and Prospects on the International Coffee Market
Characteristics of the market
Coffee in the producing countries is mainly an export crop; home consumption is small, compared with output and exports, and is frequently met by using the inferior part of the crop. There is -no domestic production in importing countries; demand is met exclusively by imports. Consumption habits are such that demand increases slowly and gradually with population and income in importing countries, but reacts only slightly to price changes; substitution by or for other beverages—tea or cocoa—in response to widening margins between prices is negligible. Being insensitive to business recessions or booms in importing countries, demand has shown very minor year-to-year fluctuations.1
The behavior of prices—the alternation of a few years of boom conditions with a protracted period of depression—is determined primarily by factors on the supply side, largely the peculiar pattern of growth of coffee trees. Most coffee trees have a gestation period of some four to five years before beginning to bear,2 and subsequently live for twenty years or more; hence the response of supply to price changes in either direction is extremely slow. During periods of high prices, and until additional output is available from newly planted trees, the possibilities of increasing the exportable supply of coffee are very limited; the resulting several years of high prices induce planting far beyond the level required to meet demand. The scaling down of current production in response to reduced prices is confined, as a rule, to lessened care, or abandonment, of older plantations, and is not sufficient to bring output into line with demand. Superimposed on the conditions described are short-run fluctuations in output, resulting from cyclical variations in the fertility of trees and, in addition, from weather conditions, damage by insects, and other natural causes.
Market supply, as distinct from output, has frequently been reduced by deliberate measures—the retention of stocks and, during some periods, the large-scale destruction of coffee.
Current conditions
Current conditions on the coffee market—a large excess of output over demand,3 which at present prices may well persist for many years to come—are the combined result of the various factors mentioned above. The protracted boom period of the fifties, which was preceded by nearly twenty years of depressed prices, started late in 1949. Stocks in producing countries were then almost exhausted, while current output fell short of demand. World prices rose sharply over the next few years and, although a number of countries imposed export taxes in various forms, the prices received by producers were highly profitable and induced new planting on a large scale. In Brazil, the ban on planting, which had been in force through the thirties and forties, was lifted; in many African countries, planting was actively encouraged by governments. These conditions continued for an unusually long period, owing in part to intervening crop failures, which modified the effect of new capacity on current output. Moreover, measures taken by producing countries under a series of regional and international agreements delayed, and more recently cushioned, the decline of world prices.
The first large increase in output, reflecting additional supplies from new planting, occurred in the crop year 1955/56 when output came close to 44 million bags—some 10 million bags in excess of any single crop in the early fifties. This was followed in the next season by a severe setback, caused mainly by frost damage in Brazil. Subsequent crops, however, although subject to considerable year-to-year fluctuations, showed strongly the effect of added capacity. Average production in the three years starting in 1957/58 exceeded average output in the first half of the fifties by some 65 per cent. Exports increased much more slowly—by about 25 per cent—and about one fourth of exportable supplies remained unsold.
Table 1 shows that the rise in production between the first half and the later years of the fifties was not evenly distributed among the main areas; while output in Africa and in Brazil nearly doubled, production in the Western Hemisphere countries other than Brazil, taken together, rose by not more than one third. The types of coffee grown differ for the three regions; most of the African production consists of “robusta,” considered by most importers inferior to the “arabica” varieties grown in Latin America (and in Asia). In Latin America, the latter are further subdivided into two broad groups— the varieties grown in Brazil known as “Brazils” and the so-called milds grown in the rest of Latin America and carrying a premium over Brazils. As a result of the uneven increase in output, supplies of mild coffee are not as overabundant as those of other varieties; this has been reflected in the movement of their prices in relation to those of Brazilian (and African) coffee. As shown in Table 2, the prices of Colombian coffee have declined less than those of Brazil, and their premium over the latter has considerably widened since the early fifties.
Coffee: Annual Averages of Exportable Production1 AND Exports, by Main Areas
(In millions of bags)
Production data refer to average of crop years ended in the calendar years shown.
Coffee: Annual Averages of Exportable Production1 AND Exports, by Main Areas
(In millions of bags)
| 1951–55 Average | 1956–58 Average | 1959–61 Average | |||||
|---|---|---|---|---|---|---|---|
| Production | Exports | Production | Exports | Production | Exports | ||
| Brazil | 14.7 | 14.5 | 17.9 | 14.7 | 28.3 | 17.2 | |
| Other Western Hemisphere | 11.5 | 11.5 | 13.6 | 11.7 | 15.1 | 13.6 | |
| Africa | 5.7 | 5.7 | 8.6 | 8.6 | 11.8 | 10.7 | |
| Asia | 0.7 | 0.7 | 1.4 | 1.2 | 1.7 | 1.3 | |
| Total | 32.6 | 32.4 | 41.5 | 36.2 | 56.9 | 42.8 | |
Production data refer to average of crop years ended in the calendar years shown.
Coffee: Annual Averages of Exportable Production1 AND Exports, by Main Areas
(In millions of bags)
| 1951–55 Average | 1956–58 Average | 1959–61 Average | |||||
|---|---|---|---|---|---|---|---|
| Production | Exports | Production | Exports | Production | Exports | ||
| Brazil | 14.7 | 14.5 | 17.9 | 14.7 | 28.3 | 17.2 | |
| Other Western Hemisphere | 11.5 | 11.5 | 13.6 | 11.7 | 15.1 | 13.6 | |
| Africa | 5.7 | 5.7 | 8.6 | 8.6 | 11.8 | 10.7 | |
| Asia | 0.7 | 0.7 | 1.4 | 1.2 | 1.7 | 1.3 | |
| Total | 32.6 | 32.4 | 41.5 | 36.2 | 56.9 | 42.8 | |
Production data refer to average of crop years ended in the calendar years shown.
Coffee: Prices in New York
Coffee: Prices in New York
| Brazil Santos 4 | Colombia Manizales | Uganda Natives | Colombia | Uganda | |
|---|---|---|---|---|---|
| (U.S. cents per pound) | (As per cent of Brazilian price) | ||||
| 1951-53 | 55.3 | 58.6 | 46.1 | 106 | 83 |
| 1954-56 | 64.6 | 72.9 | 43.3 | 114 | 66 |
| 1957 | 56.9 | 63.9 | 34.6 | 112 | 61 |
| 1958 | 48.4 | 52.3 | 37.6 | 108 | 78 |
| 1959 | 37.0 | 45.2 | 28.7 | 122 | 78 |
| 1960: Jan-Jun | 37.0 | 45.2 | 21.3 | 122 | 57 |
| Jul-Dec | 36.3 | 44.6 | 19.0 | 124 | 52 |
| 1961: Jan-Jun | 37.4 | 44.0 | 18.3 | 118 | 49 |
| Jul-Dec | 34.8 | 43.2 | 18.6 | 124 | 54 |
Coffee: Prices in New York
| Brazil Santos 4 | Colombia Manizales | Uganda Natives | Colombia | Uganda | |
|---|---|---|---|---|---|
| (U.S. cents per pound) | (As per cent of Brazilian price) | ||||
| 1951-53 | 55.3 | 58.6 | 46.1 | 106 | 83 |
| 1954-56 | 64.6 | 72.9 | 43.3 | 114 | 66 |
| 1957 | 56.9 | 63.9 | 34.6 | 112 | 61 |
| 1958 | 48.4 | 52.3 | 37.6 | 108 | 78 |
| 1959 | 37.0 | 45.2 | 28.7 | 122 | 78 |
| 1960: Jan-Jun | 37.0 | 45.2 | 21.3 | 122 | 57 |
| Jul-Dec | 36.3 | 44.6 | 19.0 | 124 | 52 |
| 1961: Jan-Jun | 37.4 | 44.0 | 18.3 | 118 | 49 |
| Jul-Dec | 34.8 | 43.2 | 18.6 | 124 | 54 |
The volumes of supplies offered and of actual exports from the three regions have followed only in part the changed pattern of production; the distribution of exports was greatly influenced by a series of informal year-to-year agreements, the first of which came into force in October 1957. During the first two seasons, these agreements covered only Latin American countries; their exports were subject to restrictions while African producers expanded their exports in line with output. This development was further enhanced by some shift in demand toward the cheaper robustas, owing to the fact that a greater proportion of robustas may be used in the production of soluble coffee without impairing the taste.
The greatest restraint relative to production was placed on exports from Brazil, partly because output had risen there much more than in other Western Hemisphere countries, and partly because lack of storage facilities and inability to enforce controls in a number of smaller countries limit their capacity to withhold coffee from the market. Because of its large share in the market, Brazil is better equipped than any other exporting country to influence prices through its own actions. These actions have been taken repeatedly,4 and Brazil’s exports at various times have remained well below the agreed quota. Thus in 1957/58, Brazil exported just over 13 million bags, about 1.5 million less than would have been permissible under the terms of the agreement and roughly 1 million less than in the preceding 12 months. Both the volume and the prices of African exports benefited from this policy.
In October 1959, the French Community and Portugal joined the agreement on behalf of their African territories; in October 1960, the United Kingdom followed suit, accepting quotas for British East Africa. Nevertheless, in contrast to prices of Brazils and milds, which have remained fairly stable over the last two years, the prices of African coffees have continued to decline. This is explained, in part, by continued competition among African producers, some of which, notably the Congo and Ethiopia, have not joined the agreement; but there has also been a tendency for demand to shift back to Brazilian coffee since its price was sharply reduced in 1958 and 1959. Inasmuch as most importers consider African coffee of the robusta type inferior to Brazils, a sizable reduction in the price of the latter will induce shifts in demand and ultimately result in widening the discount on robustas.
The volume of world exports of coffee has been steadily rising over the last few years, but the decline in prices has resulted in a substantial diminution in export proceeds from coffee (Table 3). If the sudden upsurge and subsequent decline of prices in 1954, caused by frost damage in Brazil and the anticipation of temporary shortage, are disregarded, prices and receipts were well maintained through 1957. Between 1957 and 1960, however, the gradual decline in prices reduced export receipts from coffee by some $450 million, or nearly 20 per cent, in spite of a substantial increase in volume.
Coffee Exports: Value, Volume, and Average Price, 1953-60
Coffee Exports: Value, Volume, and Average Price, 1953-60
| 1953 | 1954 | 1955 | 1956 | 1957 | 1958 | 1959 | 1960 | |
|---|---|---|---|---|---|---|---|---|
| Volume (million bags) | 34.6 | 29.3 | 33.8 | 38.4 | 36.1 | 36.6 | 42.1 | 42.8 |
| Average price (cents per pound) | 51.0 | 65.6 | 49.0 | 47.5 | 48.0 | 41.4 | 35.3 | 32.6 |
| Value (million U.S. dollars) | 2,300 | 2,540 | 2,180 | 2,410 | 2,290 | 2,000 | 1,960 | 1,840 |
Coffee Exports: Value, Volume, and Average Price, 1953-60
| 1953 | 1954 | 1955 | 1956 | 1957 | 1958 | 1959 | 1960 | |
|---|---|---|---|---|---|---|---|---|
| Volume (million bags) | 34.6 | 29.3 | 33.8 | 38.4 | 36.1 | 36.6 | 42.1 | 42.8 |
| Average price (cents per pound) | 51.0 | 65.6 | 49.0 | 47.5 | 48.0 | 41.4 | 35.3 | 32.6 |
| Value (million U.S. dollars) | 2,300 | 2,540 | 2,180 | 2,410 | 2,290 | 2,000 | 1,960 | 1,840 |
Internal arrangements: prices paid to exporters
As indicated above, most of the producing countries levy export taxes on coffee, which vary widely in form and degree. Moreover, prices paid by governments for coffee delivered for stockpiling are held far below those paid for exports. Thus, average prices received by exporters and producers remain well below the world market level.
Until May 1961, taxation of Brazilian coffee exports had taken the form of applying a much less favorable exchange rate for coffee than for other exports. New regulations which came into force on May 15, 1961 provide that for each bag exported $22.00 has to be surrendered as a contribution to the so-called defense fund, while the remaining exchange may be sold at the free cruzeiro rate. At the price of $42.00 per bag, exporters retained about $20.00 per bag of 60 kilograms, or some 15 cents per pound.5 In an attempt to foster the production and export of high quality coffee, the standard of what is accepted for export has been set very high and only about 60 per cent of production is expected to qualify. Inferior coffee, i.e., coffee “without export characteristics,” may be sold to the Coffee Institute at prices much below those of coffee qualifying for export.6
Colombian exporters, under the country’s rather complex tax system including the obligation to surrender to the Government some 15 per cent of the quantities exported, retain roughly 75 per cent of the value of deliveries computed at the mixed rate of 6.50 pesos per U.S. dollar. In Guatemala and El Salvador, where progressive ad valorem duties are in force, the duties vary between some 12 per cent and 15 per cent of the export value. In a number of other Latin American countries, export taxes are much smaller. In Africa, where prices have declined heavily, export taxes, where levied, vary from 5 to 18 per cent.
Although prices received by exporters and producers have been kept below market prices, there has been no indication so far that prices received by exporters in any country have become unprofitable. Production has continued to increase, and in some areas new planting is still proceeding. Government-sponsored programs are under way to raise the quality of the product, as well as the yield and resistance of trees, but no action has yet been reported designed to reduce output or capacity.
Prospects
For a number of years to come, production may be expected to continue to be far in excess of demand unless prices are sharply reduced. The unusually long period of high prices has stimulated new planting over many years; in some areas it still continues. Thus, production will gradually increase as additional trees come into bearing and as those which have recently started to bear mature fully. These additions are likely to outweigh reductions through the abandonment of old plantations. Exportable production in the current crop year is expected to be close to 61 million bags; the average for the preceding two seasons came to some 58 million. When account is taken of fluctuations caused by weather and other factors influencing annual crops, average production for the next five to six years may be put at some 60 million bags a year.7 At current prices, however, import demand is expected to remain well below this figure. If the assumption is made that imports increase by an average of 2½ per cent a year on account of the growth of population and income in the importing countries, average imports for the six years 1961-66, on the basis of actual imports of 42.5 million bags in 1960, would amount to some 46.5 million bags. This would leave surpluses averaging some 13.5 million bags a year, roughly equal to annual additions to producing countries’ stocks in recent years. If consumption continued to rise at the annual rate of 2½ per cent, it would reach 60 million bags by 1973.
The Problem and Measures to Solve it
The problem facing coffee exporting countries is thus obviously one of heavy and, in the absence of remedial action, protracted surpluses and a wasteful accumulation of stocks. The final solution can consist only in restoring, and in the longer run maintaining, a reasonable balance between demand and supply. Such a balance may be sought by raising consumption, by reducing output, or by a combination of the two. It cannot be expected that this goal will be quickly reached, particularly if it is to be achieved by reduction of output; several years must be allowed for its consummation and, in the meantime, measures will have to be taken to prevent a collapse of the market.
The first-mentioned alternative—that of raising demand to the level of current production—would involve, as will be shown, a very drastic cut in prices and exchange receipts for coffee exports. Because of the large share provided by coffee in the total export earnings of many countries, such a reduction would create serious difficulties and would, no doubt, be strongly resisted. The following attempt to indicate the price decline required to raise demand to the level of production is not intended to suggest a solution along these lines but to provide a rough measure of the reduction in prices which would be necessary, and of the impact on export earnings. On the basis of a price elasticity for green coffee of roughly —0.2 or —0.3,8 the reduction of current prices required to raise import demand to the expected production level of 60 million bags is found to be some 57 per cent (at elasticity of —0.3) or 72 per cent (at elasticity —0.2). This would mean that the average price (unit value) of 32.6 cents per pound received for total coffee exports in 1960 would have to be lowered to 14 cents (or 9 cents) per pound. Before discussing the short-run effects of such a fall in prices, it should be noted that it would not leave supply completely unaffected. Though the reaction might be slow, the abandonment of old plantations, neglect of trees, and lack of replanting would sooner or later reduce output, and prices would rise again. A long-run equilibrium price which would induce output to keep in line with demand would, no doubt, be considerably higher.
In the short run, however, which could well be a number of years, supply would not change appreciably. If, over the next few years, an average of some 60 million bags were to be exported at prices of some 14 cents or 9 cents per pound, total receipts for coffee would amount to some $1,100 million or $710 million, respectively, compared with $1,840 million received in 1960. The reduction in total receipts would thus be $740 million at a price elasticity of —0.3 or well over $1 billion at a price elasticity of —0.2.
These data should be taken as no more than a rough indication of the order of magnitude; they may well be too high or too low. The elasticities used in their computation have been based on previous reactions to price changes within a narrower range than those indicated, and may not hold for further drastic price reductions.
A point of interest in this connection is that per caput consumption in the United States remained practically unchanged over the five years 1956-60,9 although retail prices moved closely with import prices of green coffee and declined, between 1957 and 1960, by some 30 per cent. Consumption in a number of European countries, however, increased considerably; imports into Europe in 1960 were some 30 per cent above those in 1957, partly attributable to gradual import liberalization in a number of countries. But the response to reduced prices was obviously strong, particularly since retail prices in European countries—in part because of fixed rates of tax on coffee—may not have fully reflected the decline in import prices. Whether the strong response of European consumption and the lack of reaction of U.S. consumers will continue, and how other areas will respond to further sharp price reductions, cannot be predicted.
Because of the very unequal distribution of current and prospective surplus production by type of coffee and country of origin, the impact on prices and export receipts would greatly vary by type and country. The data in Table 4, comparing actual exports in 1961 with estimated exportable production in 1961/62, provide a rough indication of the potential to expand exports from future crops in the main areas. Since most additional supplies would come from Brazil, where exports could be nearly doubled, while exports of milds supplied by Colombia and other Western Hemisphere countries could probably not be raised by more than 15 per cent, prices for Brazils would almost certainly have to decline more than those of milds in order to produce a sufficient shift in demand. The widespread preference of consumers for Brazils over robustas, and the resulting tendency to shift to the former in response to a sharp price reduction, would force down prices for robustas even more, and the margins between the prices of the two types of coffee would widen. Thus, the impact on export receipts would probably be most pronounced for African countries, on account both of price movements and of the comparatively minor potential expansion in volume, though some offset would be provided by the preferential treatment of African coffee in a number of European countries.
Coffee Exports: Potential Expansion from Main Areas
Coffee Exports: Potential Expansion from Main Areas
| Brazil | Colombia | Other Western Hemisphere Africa | Africa | Other | Total | |
|---|---|---|---|---|---|---|
  | ||||||
| Exportable production, 1961/62 | 30.0 | 6.8 | 9.5 | 12.6 | 1.9 | 60.8 |
| Exports, 1961 | 17.0 | 5.7 | 7.8 | 11.6 | 1.6 | 43.7 |
| Potential expansion | 13.0 | 1.1 | 1.7 | 1.0 | 0.3 | 17.1 |
  | ||||||
| Potential expansion | 76 | 20 | 22 | 9 | 18 | 39 |
Coffee Exports: Potential Expansion from Main Areas
| Brazil | Colombia | Other Western Hemisphere Africa | Africa | Other | Total | |
|---|---|---|---|---|---|---|
| ||||||
| Exportable production, 1961/62 | 30.0 | 6.8 | 9.5 | 12.6 | 1.9 | 60.8 |
| Exports, 1961 | 17.0 | 5.7 | 7.8 | 11.6 | 1.6 | 43.7 |
| Potential expansion | 13.0 | 1.1 | 1.7 | 1.0 | 0.3 | 17.1 |
| ||||||
| Potential expansion | 76 | 20 | 22 | 9 | 18 | 39 |
Some contribution toward narrowing the gap between output and consumption could be made by reductions of taxes and duties in a number of European countries, which would raise consumption without altering the price of green coffee. However, the effect of such steps should not be overrated; a rough indication of their impact is provided in a study made by the Food and Agriculture Organization,10 which computed the expected increase in imports in response to a 20 per cent, a 50 per cent, and a 100 per cent reduction of all duties and taxes in eight European countries—Austria, Denmark, Finland, France, Federal Republic of Germany, Greece, Italy, and Sweden— and in Canada. This study estimates that, if all fiscal charges were abolished, imports into these nine countries would increase by some 1.2 million bags, or about 10 per cent of expected surpluses.11 Thus, even under the unrealistic assumption that importing countries would agree to abolish all fiscal charges on coffee imports and consumption, the resulting rise in import demand would not affect the need to reduce production, and would only slightly diminish the extent to which this must be undertaken in order to restore balance between supply and demand.
Global consumption in importing countries can be predicted fairly accurately for a number of years ahead. It is also possible to project, on broad lines, the distribution of demand among the main types of coffee, although this is more flexible than total demand. The practicability of thus forecasting demand developments should greatly facilitate adjustment of output. An important point, however, is that contraction is made more difficult by the fact that production in most areas appears to be profitable at prices below (and in some countries very far below) those prevailing on the market. It may indeed prove impossible to induce the necessary reduction in output without at least some decline in market prices and a considerable increase in taxes levied by producing countries. To induce and speed up the adjustment of production, drastic measures would be required, including reduction of receipts by exporters and producers and strict controls on planting, thus inducing the abandonment of existing capacity and the promotion of alternative uses for the land. The implementation of these measures would be the responsibility largely of individual governments, but concerted action is required to determine, on broad lines, the desirable level of production in individual countries.
The temporary expedient of maintaining production and withholding supplies from the market would not be a satisfactory substitute for such measures, since it would result in an increasingly difficult problem of costly accumulation of stocks and a waste of resources— land and labor. Moreover, as has been proved by past experience, the mere existence of large stocks makes it difficult to maintain prices.
The approach to scaling down production will differ from country to country and will have to be worked out according to local conditions and possible alternatives. However, as production is gradually reduced, additional measures will be needed to support the export incomes of producing countries. Although the problem is obviously not one of export or price stabilization in the usual sense of evening out short-run fluctuations, the techniques which may be applied are by and large the same. The main choice is between two methods: (1) letting market prices decline to the level at which exportable production would be absorbed and supplementing foreign exchange earnings of exporting countries by “compensatory” payments in the form of aid provided by importing countries; or (2) supporting prices through an international agreement of either the multilateral long-term contract or the quota type.
In appraising these alternative approaches, it will be assumed here, as a first approximation, that they would be acceptable to both exporting and importing countries. They will then be examined to determine whether and to what extent they would facilitate the final goal of scaling down production; secondly, how effective they would be in maintaining exporters’ incomes during the “transition” period; and, thirdly, what burden—financial, technical, and administrative—they would place on importing and exporting members. Finally, the simplifying assumption of general acceptability will be dropped, and the probable objections of countries to undertake certain obligations will be taken into account.
Free markets and compensation of export shortfalls
Under a free market arrangement, producing countries would undertake to offer their total exportable output (defined as output in excess of domestic consumption) on the market, to discontinue operations supporting world prices, and to accept market prices as they emerge. Importing countries would undertake to make up for the resulting declines in export receipts, in toto or partially, by extending grants to exporting countries for the period deemed necessary to scale down production, say some five to six years. The order of magnitude of the average decline in price and the shortfall in receipts has been indicated above; in the course of time, however, prices undoubtedly would rise as production gradually declined. The volume of exports would be highest, and receipts from these exports would be lowest, in the early years of the agreement. Thus, compensatory aid would have to be largest in these years and would gradually decline as prices recovered.
The “shock treatment” of permitting market prices to decline to an unprecedented extent, as this procedure would do, would be expected to facilitate the desired scaling down of production. Even if, under these circumstances, taxes on production were abandoned, prices to exporters and producers would be substantially reduced. In some countries, temporary subsidies to producers might become necessary to supplement their incomes; the greater part of compensation payments received by governments, however, could be devoted to the diversion of resources to alternative uses. The low level of market prices would help in overcoming resistance to such shifts.
Exchange receipts of producing countries would be maintained at agreed levels and there would be little, if any, accumulation of stocks, thus eliminating or greatly reducing the financial burden of carrying stocks.
Ways for providing the funds required for compensation would have to be determined. As indicated earlier, the total decline in receipts by all exporters, compared with receipts in 1960, could be as large as $1 billion a year. Even if only 50 per cent of the shortfall were offset, the amounts to be provided would be large in proportion to total official grants and long-term loans currently made available to less developed countries. Unless additional revenue could be provided, e.g., through the imposition of a special tax, the compensation payments would have to be met from the global funds devoted to assisting less developed countries, and total aid to these countries would not be greater than it would be if there were no compensation, although the distribution among recipients would be different.
A special tax for raising revenue, however, could be levied on coffee, though this would offset, to some extent, the stimulus of price reductions on consumption. Such an offset would be minimized if taxes were imposed primarily in countries with the lowest elasticity of demand and if countries where taxes are already levied agreed to use revenue from existing taxes to finance payments to producing countries.
Much is to be said in favor of permitting prices to decline and offsetting the reduction in export receipts by transferring to exporting countries the revenue from taxes levied in importing countries. Under such an arrangement, the impact of market forces would greatly contribute to the necessary adjustment of output, and the revenue transferred could be more easily and directly allocated to development and diversion purposes.
In theory, this solution has distinct advantages; the main objection lies in the practical difficulty of securing the agreement and adherence of importing countries to such a scheme. It is very doubtful that taxation on a sufficiently large scale and commitment to use the revenue for transfer to exporting countries would be forthcoming.
Agreements to “stabilize” prices
Of the three main types of agreement which have been developed for the purpose of stabilizing prices—buffer stocks, long-term contracts, and quota schemes—the first mentioned can be ruled out from the outset as not applicable under conditions of large and persistent surpluses.
Multilateral long-term contracts, under which consuming countries undertake the obligation to import certain quantities at prices not less than an agreed minimum and exporters undertake to sell corresponding quantities at a price not higher than the agreed maximum, are primarily intended, and are best suited, to deal with fluctuations. But they are also workable under conditions of surpluses. The merits of this type of agreement are apparent from the fact that, in contrast to quotas, where exports of members are definitely limited but are not guaranteed, contracts covering a major proportion of trade assure exporters of a market for the contracted quantities at an agreed minimum price, and permit additional trade at prices outside the agreed range.
The large surplus production, however, would complicate agreement on quantities, which otherwise should be easy because demand is subject to such very minor fluctuations.12 But in view of the undoubtedly large volume of exports which would be available at prices much below the minimum, importing countries would be reluctant to guarantee purchases close to actual requirements at a fixed price. If, however, the guaranteed quantities remained well below total imports, and the rest were to be covered at much lower prices, export receipts would not be maintained, and exporters would not gain from the agreement.
If such contracts were undertaken, the prices of “free” exports would be very low, which would again facilitate the task of reducing output. But other factors, including the administrative difficulties of implementing and carrying out the contracts, would make them unsuitable under present conditions. Even in the unlikely event that importers would commit themselves to buy a large proportion of their requirements at prices not below the agreed minimum, conditions on the residual market would not be satisfactory. Not only would prices decline to levels which would jeopardize continuation of the contracts, but consumption could not be raised sufficiently to absorb total production. Stocks would accumulate, either on a speculative basis in importing countries—with adverse effects in future years—or, if prices were to decline to a level where free market sales would stop, in exporting countries where unsold quantities would remain in the hands of producers. Thus the contract type of agreement does not promise a satisfactory interim solution, even in the most unlikely case that it would be acceptable to importing countries.
An agreement based on export quotas has the advantage of comparative simplicity, since it could be built on existing arrangements among producing countries, which now cover roughly 90 per cent of total exports. The participation of importing countries would make the agreement more formal and stronger. The difficulties currently experienced through competition from nonmember producers could be overcome if participating importers undertook the obligation of limiting to agreed quantities their purchases from nonmember countries.13
In contrast to the schemes discussed above, quota agreements per se offer no price disincentive to producers. It would be desirable, therefore, to provide for a year-by-year reduction of the minimum prices or price ranges indicated in the agreement, so as to bring prices gradually more into line with long-term equilibrium prices. Even so, it would be essential to include in the agreement explicit obligations by producing member countries to reduce output gradually and to scale it down to prospective exports. Basic export quotas, if determined for a number of years ahead, would give an indication to individual countries of the desirable level of production to be maintained. Possibilities of selling outside the quota would be limited, even if exports to new markets continued to remain “ex quota.” The agreement would also have to provide that stocks held in producing countries should not exceed levels deemed desirable as buffers against such temporary shortages as may develop in the more distant future through crop failures in any particular year.14 This would obviously entail large-scale destruction of excess production, mainly during the early years of the agreement.
The administration of a quota agreement does not pose difficult problems, although a number of countries would have to develop more effective ways of implementing controls. If necessary, importing countries could be called upon to assist.
The need to reduce production and capacity, and to divert resources to alternative uses, as well as the disposal of stocks, would impose considerable financial burdens on the countries concerned. Inasmuch as revenue arising from differentials between market prices and returns to exporters would probably be the main source of finance, governments might find it necessary to keep prices to exporters and producers very low. Countries not subjected to major reductions in output might be called upon to share the burdens of others.
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This Note was prepared in September 1961. Since then steps have been taken by the Coffee Study Group, established in Washington, toward negotiating a comprehensive agreement based mainly on export quotas. In addition, there will be provisions with respect to prices, limitation of imports from nonparticipants, control of production, level of stocks, and promotion of consumption. Preliminary discussions, based on a draft submitted to governments, were held in March and April 1962; a formal negotiating conference under the auspices of the United Nations is being called for July 1962.
RESUME
Après une période exceptionnellement longue caractérisée par une pénurie relative et des prix élevés, le marché international du café est entré vers la fin de la décade 1950-60 dans la phase excédentaire du cycle de production. Le présent article, après avoir passé en revue la situation actuelle et les perspectives, qui varient selon les divers types de café et les régions de culture, cherche à évaluer quantitativement les problèmes des pays producteurs. Les indications sur la production et la demande futures semblent indiquer que, faute de mesures pour rétablir l’équilibre, la production dépassera la demande d’environ 25-30% dans les cinq ou six années prochaines. La demande présentant un caractère très inélastique, il faudrait que les prix s’abaissent à des niveaux sans précédent, peut être à moins d’un tiers du niveau actuel pour que la consommation et la production futures soient égalisées. Les recettes totales découlant des exportations de café, qui ont déjà fortement diminué ces années récentes, seraient réduites à la moitié (ou davantage) du niveau actuel.
Des mesures énergiques s’imposent pour ralentir la production, mais il faudrait un certain temps pour procéder aux ajustements nécessaires. Dans l’intervalle, des mesures doivent être prises pour maintenir les recettes d’exportations des pays producteurs. Deux procédures à cet effet—mesures compensatoires ou stabilisation de prix—sont brièvement analysées, compte tenu des conditions particuliéres du marché, et l’on peut conclure qu’un accord fondé sur les contingents d’exportation, accord qui pourrait s’établir sur la base des dispositions actuelles, constituerait peut-être une solution pratique.
RESUMEN
El mercado internacional del café, después de un largo y poco común período de relativa escasez y precios altos, entró en los últimos años de la década 1950-60 en la fase de los excedentes del ciclo del café. Este estudio, después de investigar la situación actual y las futuras perspectivas, que difieren para los diferentes tipos de café y para las diferentes áreas productoras, tiende a formular ciertas apreciaciones cuantitativas de los problemas que están afrontando los países productores. Los datos de la futura producción y demanda del café sugieren que—a menos que se tomen ciertas medidas para volver al equilibrio—la producción excederá a la demanda en un 25 ó 30 por ciento aproximadamente en los próximos 5 ó 6 años. En vista del alto grado de inelasticidad de la demanda, los precios tendrían que ser reducidos a niveles muy bajos (quizás a menos de un tercio del precio actual) para aumentar el consumo a un nivel igual al de la oferta actual y futura. El total de ingresos por exportaciones de café, que ha disminuido considerablemente en los últimos años, tendría que ser reducida a la mitad, o menos de la mitad, de los niveles actuales.
Las condiciones requieren medidas drásticas para bajar el nivel de la producción; sin embargo, se tomaría algún tiempo para efectuar los ajustes necesarios. Mientras tanto, ciertas medidas son necesarias para mantener las utilidades de las exportaciones de los países productores. Para este efecto ciertos métodos alternativos (medidas compensatorias o estabilización de precios) son ligeramente discutidos en relación a las condiciones particulares de los mercados, y la conclusión obtenida es que un acuerdo basado en las cuotas de exportación, que puede ser establecido sobre los convenios actuales, podría proporcionar una solución factible.
Miss Lovasy, Assistant Chief of the Special Studies Division, was formerly with the Economic and Financial Department of the League of Nations. She is the author of a memorandum on “International Cartels,” published by the United Nations, and of several articles in economic journals.
Consumption in importing countries over the last 70 years has risen fourfold. It was found that shortfalls from trend (five-year working average), with the two war periods excluded, amounted on the average to less than 2.5 per cent and that the maximum shortfall was about 7 per cent.
This has applied, until recently, to the type of tree grown in Western Hemisphere countries, but in the last few years new strains have been developed which begin to bear in two years. Coffee trees of the “robusta” type grown in Africa have a gestation period of some two to three years and are less sensitive to the vagaries of the weather than the “arabica” varieties of the Western Hemisphere. Coffee from the latter, however, is preferred by most consuming countries and sells at higher prices than robusta types.
The term “production” or “output” throughout this paper refers to “exportable production,” i.e., total production minus domestic consumption in the exporting countries. “Demand” and “consumption” refer to import demand and to consumption in the importing countries.
Action taken by Brazil to support world prices of coffee has a long history. Brazil succeeded in maintaining prices for a few years before World War I and again in the mid-twenties after production had more than caught up with demand. Through most of the thirties, it continued to stockpile and to destroy coffee on a large scale, but could not prevent the heavy and sustained price decline experienced in those years. The considerable expansion of output in other regions, first in other countries in the Western Hemisphere and later in Africa, and the gradual decline in Brazil’s share in total exports—from some 70 per cent before World War I to some 40 per cent in the fifties—have been attributed, in part, to Brazil’s policy of price support.
These regulations were based on a free rate of 265-276 cruzeiros per U.S. dollar and the contribution to the defense fund “will be adjusted, if necessary, to offset any harmful influence of exchange rate variations over coffee prices.” (George Gordon Paton & Co., Coffee Intelligence, June 1, 1961.)
The price for inferior coffee, originally set at 1,600-1,700 cruzeiros per bag of 60 kilograms, has since been raised to 2,700 cruzeiros (some 7 cents per pound). Inasmuch as inferior coffee is sold in carloads at points in the interior, the price is not strictly comparable with the export price, which applies to bagged coffee f.o.b. seaports.
Though no official estimates are available, discussions with experts indicate that the figure of 60 million probably underestimates, rather than overestimates, average output over the next five to six years. Large-scale destruction of trees, if carried through, could, however, change the prospects.
These values (taken from an unpublished memorandum by the author) were derived on the basis of demand elasticities for the United States and a number of European importing countries. The two figures of —0.2 and —0.3 resulted from using two alternative values for the elasticity of demand in the United States. Recent developments suggest that the lower of the two values is the more realistic.
Annual per caput consumption of green coffee in the United States was as follows, in pounds: 1956, 16.0; 1957, 15.7; 1958, 15.6; 1959, 15.9; and 1960, 15.8.
Food and Agriculture Organization, “Coffee Taxes and Consumption in Importing Countries,” Monthly Bulletin of Agricultural Economics and Statistics, September 1960, pp. 8-13.
The results are based on least squares regression analysis, relating per; caput net imports of green coffee to retail prices of roasted coffee and per caput income. Prewar and postwar data (up to 1958) were used; compared with net imports in 1958, the increase in imports stimulated by a complete abolition of fiscal charges would amount to some 14 per cent. The authors point out, however, that their results are subject to a number of qualifications and should be considered as no more than a rough indication of the order of magnitude involved.
By the same token, the stability of import demand for coffee reduces the significance of importers’ guarantees to purchase a certain minimum quantity.
Such a limitation is provided under the terms of the International Sugar Agreement: the quantities which may be imported from nonmembers are limited to those actually purchased in an agreed base period.
Neither of these provisions is new to quota agreements. The Sugar Agreement calls for the regulation of production in such a way as to limit stocks in producing countries to agreed levels.